UK Inflation Drops, USD Softens and Bond Yields Retreat.

USD Update: The U.S. dollar, measured by the DXY index, dipped 0.35% to 102.13 on Tuesday. This softening is attributed to the ongoing decline in Treasury yields following the Federal Reserve’s recent pivot. The Fed, adopting a more optimistic stance on inflation, hinted at potential rate cuts, signaling a significant shift in policy. With expectations of multiple rate cuts in 2024 and a focus on economic growth over price stability, bond yields are expected to decrease, creating a challenging environment for the greenback. Market exuberance over the Federal Open Market Committee’s dovish posture is also likely to hinder the U.S. dollar, favoring riskier currencies. The DXY index could hit new lows by the end of 2023.

GBP Update: UK inflation surprised by falling to 3.9% in November, the lowest since September 2021 and below expectations. The decline was observed in both the annual and month-on-month readings, with core CPI at 5.1%. The significant contributors to the drop were transport, recreation and culture, and food and non-alcoholic beverages. Despite this, the Bank of England maintained a hawkish tone, keeping the main interest rate at 5.25% and signaling a need for restrictive policy for an extended period.

EUR/GBP Cross Gains Momentum on Weak UK Inflation: The EUR/GBP cross recovered losses in the early European session on Wednesday. Weaker-than-expected UK inflation data, particularly the Consumer Price Index (CPI) at -0.2% MoM in November, weighed on the British Pound (GBP) and provided support for EUR/GBP. The cross, trading near 0.8645, gained 0.21% on the day. The Bank of England’s Deputy Governor Sarah Breeden emphasized the need for restrictive policy to control inflation, contributing to the GBP’s decline against the Euro (EUR) and benefiting the EUR/GBP cross.