Pound surges to 15-month high against the dollar as US inflation cools

The pound surged to a 15-month high against the dollar yesterday after US inflation dropped sharply to its lowest level in more than two years.

The bigger-than-expected fall to 3 per cent in June, down from 4 per cent in May, highlighted the success of the Federal Reserve, the US central bank, at getting a lid on price pressures – in sharp contrast to the UK where the Bank of England is struggling to contain inflation, stuck at 8.7 per cent.

The Bank had been slow to address price pressures, claiming they would prove ‘transitory’, before switching gear and launching into a series of rate hikes.

Yesterday’s numbers resulted in sterling gaining 0.47 per cent against the dollar, with the pound trading as high as $1.30. The last time that the pound reached $1.30 was in April 2022.

The dollar was on the back foot against other currencies as traders cut bets on the Fed raising rates. 

Sterling has risen by 2.28 per cent against the dollar this month as markets bet on several more interest rate rises from the Bank of England.

It comes as swaps markets are pricing in a peak Bank rate approaching 6.5pc in March next year.

Matthew Ryan, head of strategy at Ebury, said that would make it ‘the most hawkish major central bank in the world between now and then’. 

The fall in US inflation comes after the Fed’s aggressive rate rise action last year, lifting rates by a bumper 0.75 percentage points four times during a burst of policy tightening last year.

That has seen inflation, which had hit 9 per cent last year, moving quickly back down towards its 2 per cent target.

Core inflation, which strips out volatile food and energy costs, has proved stickier. But the latest figures showed it eased more rapidly than economists expected, from 5.3 per cent to 4.8 per cent.

Lael Brainard, a former Fed vice-chairman, said the news was evidence that the country was winning its inflation fight without heavy pain in the jobs market.

‘We saw new and encouraging evidence that the economy is on the path to moderate inflation accompanied by a resilient jobs market.’

‘Today’s report is consistent with our view that Fed tightening is in its final innings,’ economists from Goldman Sachs wrote, with a quarter-percentage-point increase expected in July ‘followed by unchanged policy for the remainder of the year’.