Sterling held steady with dollar losses driving GBP/USD gains to above 1.3850.

US CPI inflation data was marginally below expectations with a retreat in the core measure. The data provided some relief to risk appetite amid hopes of a less aggressive Fed tightening policy.

US bond yields edged lower after the data. Wall Street equities posted limited gains with a fresh record high for the S&P 500 index. There was little change in Asian markets amid underlying reservations over Chinese growth trends.

The dollar retreated from 4-month highs, although losses were measured. EUR/USD was held below 1.1750 after finding support just above 1.1700. Sterling held steady with dollar losses driving GBP/USD gains to above 1.3850. Commodity currencies strengthened amid the weaker US dollar and solid risk conditions.

Narrow ranges prevailed ahead of Wednesday’s New York open with caution ahead of the US CPI inflation data while EUR/USD remained trapped just above the 1.1700 level. Single-currency remained weak, but there was further support on approach to the important support level and 2021 lows.

US consumer prices increased 0.5% for July, in line with expectations, with the year-on-year rate unchanged at 5.4% and marginally below consensus forecasts of 5.3%. Underlying prices increased 0.3% on the month, slightly below expectations, with the annual rate easing to 4.3% from 4.5% and in line with market expectations. Energy prices increased 23.8% over the year with a 41.8% jump in gasoline prices.

After very strong gains over the past three months, prices of used cars stabilised on the month and there was a decline in transport services prices. The data was close to expectations, but with an element of relief that a further increase in inflation rates was avoided which increased the potential for pressures to ease later in the year.

This factor could lead to a more patient stance from the Federal Reserve and the dollar dipped lower in an immediate response to the data.

Richmond Fed Barkin was relatively dovish with comments that it could take a few months to hit the taper benchmark and that he wants to see further improvement in the labour market with a particular focus on an increased in the employment to population ratio. He also noted that the autumn would be crucial for employment trends.

The Euro found it difficult to gain sustained traction and EUR/USD settled around 1.1740 at the European close.

Dallas Fed President Kaplan maintained a hawkish stance with comments that inflationary pressures are expected to spread further next year. He added that if the economy develops as expected, he backed announcing a tapering plan in September with asset purchases slowing from October.

EUR/USD settled around 1.1740 at the New York close and there was little change in early Europe on Thursday with the dollar resisting further losses.

Chinese new loans increased CNY1080bn for July after a CNY2120bn increase the previous month and below consensus forecasts and there was an even sharper decline in total social financing for the month. M2 money supply growth also slowed to 8.3% from 8.6% previously and the data overall reinforced concerns over a net slowdown in Chinese credit growth which would also tend to undermine global growth.

US Treasuries rallied after the US inflation data, although there was a retreat from initial gains. Kansas City Fed President George stated that the time had come to dial back the settings on monetary policy, although she added that the road to normalisation was likely to be long and bumpy and USD/JPY settled around 110.50 at the European close. San Francisco President Daly confirmed that she would back tapering later this year or early next year.

Fitch affirmed Japan’s credit rating at A with a negative outlook with USD/JPY marginally lower at 110.40 in early Europe with EUR/JPY around 129.60.

Sterling overall was unable to make headway ahead of Wednesday’s New York open with a GBP/USD test of the 1.3800 area. Although there were expectations that the Bank of England would move towards a tighter policy, there were no new headlines to help spur UK currency buying.

GBP/USD advanced after the US CPI inflation data with a move above 1.3850 while GBP/EUR secured slight gains above 1.1800 on Tuesday. Overall risk appetite held firm after the US data which helped underpin Sterling in global markets, especially with support for commodity currencies.

Housing data remained strong with the RICS index at 79% for July from 82% the previous month.

June UK GDP growth was slightly above consensus forecasts at 1.0% with second-quarter growth in line with expectations at 4.8%. Industrial production data was again weaker than expected and the trade deficit widened on the month. The Sterling impact was limited as GBP/USD traded just below 1.3870.

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