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Dollar Gains Ground on Pound Amid UK Inflation Slump
The dollar made inroads against the pound on Wednesday following the release of data showing a significant dip in UK inflation. This stoked greater expectations of forthcoming interest rate cuts by the Bank of England.
Inflation in the UK dropped to its lowest level in more than two years in November. This led investors to fully anticipate a Bank of England rate cut by May 2024 and assign an almost 50% likelihood of a cut in March.
"We've seen many banks pricing in (interest rate) cuts. I believe the Bank of England was falling a little behind given the high inflation, but it's now beginning to trend in the same direction," observed Vassili Serebriakov, a foreign exchange and macro strategist at UBS.
"Moreover, the pound has appreciated significantly in recent weeks, I think it's merely undoing some of these gains," said Serebriakov.
The pound fell 0.5% to $1.26665, briefly hitting a 2-day low of $1.2631. Despite this decline, the pound is still up around 0.4% against the dollar for the month.
Dollar Performance against Other Currencies
Across the board, the dollar remained steady against a mix of currencies. The dollar index, which gauges the U.S. currency in relation to six counterparts, last increased 0.07% to 102.2, on track to terminate a two-day downturn.
U.S. Federal Reserve members have been countering the notion of swift rate cuts in the coming year after recent meetings led markets to foresee rapid rate reductions in 2024, triggering a surge in financial market activity.
Potential constraints on the U.S. currency could come from rebalancing by investors at the month's end.
"Our proprietary model predicts a strong dollar selling indicator against all major currencies by the end of the month," noted Barclays strategists in a statement on Wednesday.
"Our highly skewed USD sentiment tracker shows a strong likelihood of moving even further into the red as 2024 commences," they added.
US Economy and Cryptocurrencies
Wednesday's data revealed an unexpected increase in U.S. consumer confidence in December. This optimistic outlook on the job market could help bolster the economy in the early part of next year.
The case for a weakening dollar continuing its slide into 2024 has been bolstered by the Federal Reserve's dovish stance in December. Nevertheless, the strength of the U.S. economy could hinder the greenback's depreciation, according to investors.
Investors are eagerly awaiting U.S. inflation data due on Friday in anticipation of hints towards future Fed policy actions.
Meanwhile, in an interview released on Wednesday, Joachim Nagel, a European Central Bank policymaker, warned that eurozone interest rates have to stay elevated and traders predicting imminent borrowing cost reductions should tread cautiously. The euro dipped 0.09% to $1.097.
Against the yen, the dollar dipped 0.17% to 143.6, following the decision of the Bank of Japan to keep its ultra-easy monetary policy intact and await more justification for any alterations.
Japan's administration intends to shrink its budget for the upcoming fiscal year for the first time in more than a decade, as reported by Reuters on Wednesday.
In the world of cryptocurrencies, bitcoin shot up by 4.4% to $44,118, its highest level since December 9. The crypto market has been rejuvenated this year, helped by numerous applications for spot bitcoin and ether ETFs, including those submitted by traditional financial powerhouses, following a series of breakdowns in 2022.
