Dollar Strengthens After CPI; Sterling Hit by GDP Release

The U.S. dollar strengthened in early European trade Thursday to a new two-decade high after U.S. inflation remained stubbornly high, while sterling weakened on disappointing U.K. growth data. 

At 3:10 AM ET (0710 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.3% to 104.162, having earlier climbed to 104.243, the highest level since December 2002.

The U.S. consumer price index climbed 8.3% on an annual basis in April, data released on Wednesday showed, easing from 8.5% in March but still higher than the 8.1% generally expected.

While this number suggested inflation may have peaked in the U.S., it remained persistently high meaning the Federal Reserve’s current monetary policy plans to aggressively raise interest rates in the months ahead will remain intact.

The market is fully priced for at least a half percentage point increase to the policy rate at each of the next two Fed decisions, on June 15 and July 27.

“Rhetoric from the Fed remains very hawkish,” said analysts at ING, in a note. “The message seems to be that the policy rate needs to be taken to neutral as quickly as possible and then the Fed will see if it needs to do more (not less) tightening.” 

EUR/USD edged higher to 1.0514, remaining above the five-year low at 1.0469 seen at the end of last month, helped by rising expectations that the European Central Bank will lift interest rates this summer, for the first time in more than a decade.

ECB Executive Board member Isabel Schnabel was the latest policymaker to voice her concerns about the high inflation level in the Eurozone, saying the central bank must respond even if the inflation drivers that have pushed it to record levels are global by nature.

USD/JPY fell 0.5% to 129.25, with the yen benefiting from an easing in long-term Treasury yields, with the 10-year yield retreating to a two-week low of 2.848% on Thursday from a multi-year peak above 3.2% at the start of the week.

Additionally, GBP/USD fell 0.3% to 1.2210, dropping to a near 2-year low after data showed the British economy grew less than expected in the first quarter, hurt by an intensifying cost-of-living crisis.

Gross domestic product grew by only 0.8% in seasonally-adjusted terms from the fourth quarter, with preliminary data suggesting that it actually declined in March by 0.1%. Analysts had expected growth of 1.0% for the quarter, and stagnation in March.

Elsewhere, USD/CNY rose 0.7% to 6.7673, after Deputy Governor Chen Yulu said earlier Thursday that China’s central bank is making stabilizing economic growth a top priority, suggesting a more supportive monetary policy going forward.