Red-hot inflation knocks sterling, US dollar holds at 32-year peak vs yen

STERLING weakened on Wednesday (Oct 19) after hotter-than-expected UK consumer price inflation and fears of a deeper recession in Britain bolstered expectations of a less aggressive rate hike by the Bank of England (BOE) in November.

The US dollar held at a 32-year peak against the yen and rose from a two-week trough against a basket of major peers, underpinned by expectations of aggressive US Federal Reserve (Fed) interest rate hikes.

The British pound fell 0.57 per cent at 1100 GMT to US$1.12570 after data showing Britain’s annual consumer price inflation inched up to 10.1 per cent in September, rising more than expected and returning to a 40-year high hit in July.

Investors expect sterling to remain under pressure amid the outlook for rising inflation and a recession in Britain which could lead the BOE to hike by 75 basis points rather than 100 bps at its November meeting.

“Sterling edged lower against its peers after yet another upside surprise in the latest UK inflation data... The outlook for the UK economy remains relatively murky, with ballooning borrowing costs, soaring consumer prices and a government in chaos with its credibility shot to bits unlikely to inspire much confidence,” said Matthew Ryan, head of Market Strategy at Ebury.

“Following the budget fiasco, there is also a great deal of uncertainty as to the pace of upcoming Bank of England interest rate hikes,” he added.

Money markets are pricing in a total 300 bps of BOE interest rates hikes by May, according to Refinitiv data.

The BOE said it would start selling some of its huge stock of British government bonds from Nov 1, but would not sell this year any longer-duration gilts that have been at the centre of market volatility in the wake of the government’s “mini-budget” fiasco.

While the BOE quantitative tightening programme is “designed to restore its credibility and commitment to its inflation mandate, it is a risky strategy given the market’s keen awareness that the government still has to cover a gaping hole in the budget”, said Jane Foley, head of FX Strategy at Rabobank in London.

Elsewhere, the US dollar pushed 0.2 per cent higher to 149.61 yen for the first time since August 1990.

Traders are on high alert for the Ministry of Finance and Bank of Japan (BOJ) to step into the market again, as the currency pair pushes towards the key psychological barrier at 150. A cross of 145 a month ago spurred the first yen-buying intervention since 1998.

Japanese Finance Minister Shunichi Suzuki said on Wednesday that he was checking currency rates “meticulously” and with more frequency, local media reported.

The BOJ remains an outlier among a global wave of central banks tightening monetary policy to combat soaring inflation, as it focuses on underpinning a fragile economy.

“US dollar/yen continues to be dragged higher by interest rate differentials,” said Foley.

“The Ministry of Finance Japan would clearly prefer a more stable exchange rate but since the market knows that FX intervention is politically costly, it is effectively engaged in a game of chicken with the Japanese authorities,” she said.

The US dollar index - which measures the currency against six peers including the yen, sterling and euro - added 0.7 per cent to 112.74, after dropping to the lowest since Oct 6 at 111.76 on Tuesday.

The greenback, which currently reigns as the safe-haven currency of choice, has sagged this week amid the bear rally in equities globally following some upbeat earnings.

But underlying support continues to come from market pricing for two more 75 bps hikes from the Fed this year as it focuses on red-hot inflation, even at the risk of sparking a recession.

Fiscal uncertainty in Britain is also clouding the outlook for markets globally.

The euro sank 0.8 per cent to US$0.97800, retreating from Tuesday’s high of US$0.98755, a level last seen on Oct 6.

Economists in a Reuters poll predict another 75 bps rate hike from the European Central Bank on Thursday of next week.

The New Zealand dollar remained elevated, up 2 per cent this week, following Tuesday’s blowout consumer price data, which raises expectations for continued aggressive tightening by the Reserve Bank of New Zealand. The currency last traded 0.16 per cent lower at US$0.56770, close to Tuesday’s two-week high of US$0.5719. REUTERS