Pound hits six-month high against the dollar as US inflation falls

The pound soared above $1.24 and stock markets rallied yesterday as falling US inflation gave the green light to America’s Federal Reserve to scale back its aggressive rate hikes.

Sterling climbed by nearly two cents versus the greenback to hit a six-month high of $1.2443 after official figures showed consumer prices in the world’s biggest economy climbed by 7.1 per cent last month.

That was lower than the expected 7.3 per cent and down from 7.7 per cent in October.

It is the lowest level since December last year – a sign, experts said, that the Fed is winning its battle with rampant inflation, which hit 9.1 per cent over the summer.

The pound’s advance added to its recovery since the mini-Budget when it had hit an all-time low of less than $1.04. 

It was last higher back in June, before Boris Johnson’s resignation created a summer of uncertainty in UK politics.

Sterling was ahead yesterday because the US figures appeared to cement expectations of a slowdown in US rate hikes.

The Fed is set to end a succession of 0.75 percentage point increases tonight, instead going for a half point rise.

In Britain, the Bank of England is also expected to raise rates by 0.5 per cent tomorrow as it battles double-digit inflation.

Hopes that the Fed is ready to start reducing the dosage of its painful inflation-fighting medicine buoyed stock markets on both sides of the Atlantic. 

London’s FTSE 100 ended 0.8 per cent higher at 7502.89, Germany’s Dax added 1.3 per cent and France’s Cac 40 was 1.4 per cent up.

In New York, the Dow Jones initially rose 1 per cent, the S&P 500 climbed 1.7 per cent and the tech-heavy Nasdaq jumped 2.4 per cent – though the gains faded later in the session.

Rate rises in the States have been squeezing businesses and consumers in the world’s biggest economy, adding to recession pressures.

They also have wider global implications, making it harder for foreign countries and businesses to pay their dollar debts and making their imports priced in dollars more expensive.

Lower inflation signals that the series of hikes seen this year – the most aggressive path of US fiscal tightening since the 1980s – will slow and may soon stop. 

Yesterday’s data crucially also revealed that a measure of ‘core’ inflation – which strips out volatile factors such as energy and food – is starting to come under control.

Rick Rieder, chief investment officer for global fixed income at investment giant BlackRock, said: ‘If data such as today’s suggest a real trend that the momentum of inflation is lower, we could then see the Fed pause over the next few months.’

Paul Ashworth, chief North America economist at research business Capital Economics, said the inflation reading ‘provides strong support to our long-held view that mounting disinflation will soon persuade the Fed to move to the sideline after one 25 basis point hike in early February’.