USD near week high, pound up after inflation data

London

THE US dollar held near a weekly high on Wednesday (Jan 19) after a surge in US yields resulted in sharp gains this week against the euro amid growing bets that the Federal Reserve will raise interest rates.

Sterling edged higher after data showed British inflation rose 5.4 per cent in December, to its highest level in 30 years, raising rate hike expectations. Talks of a leadership challenge to Prime Minister Boris Johnson kept the pound in check.

The 2-year gilt yield rose to 0.958 per cent in early trade, its highest level since March 2018.

Ambrose Crofton, Global Market Strategist at JP Morgan Asset Management, said he expected the Bank of England to raise interest rates by 25 basis points in February. "The strength of the labour market will give the Bank of England the confidence to continue to remove support for the economy as it looks to get a better handle on inflation," he said.

In the meantime, the dollar has been boosted by US Treasury yields rising further ahead of next week's Federal Reserve policy meeting.

Ten-year Treasury yields inched up on Wednesday to touch a new two-year high of 1.9 per cent.

Markets expect the Fed to raise interest rates amid a "stable" labour market and rising inflation, said Moritz Paysen, FX trader at Berenberg.

"It is not a question of if, but how quickly and strongly interest rates will be raised," he said.

"At the same time, the impression is growing that the European Central Bank (ECB) continues to take its time to get a grip on inflation in the eurozone. This is another argument currently on the market that is helping the US dollar to regain its strength," he said.

The euro rose 0.1 per cent, back on its 50-day moving average at US$1.1340 after the previous day's sharpest daily drop in a month.

The pound was up 0.25 per cent at US$1.3632.

Against the euro , it rose 0.2 per cent to 83.14 pence, its highest since February 2020.

The overall result was that the US dollar index, which measures the greenback against 6 major peers, was 0.1 per cent lower at 95.601. REUTERS