Dollar Stabilizes, Pound Retreats; U.K. Government to Rein in Tax Cuts?

By Peter Nurse – The U.S. dollar stabilized in early European trading Friday after the release of another hot U.S. inflation number, while sterling retreated from sharp overnight gains amid speculation that the U.K. government is set to withdraw its plans for massive unfunded tax cuts.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.1% to 112.350, stabilizing after the overnight session’s 0.5% decline.

Investors have seemingly dismissed data that showed U.S. consumer prices increased more than expected in September, with sharp gains in global equity markets boosting risk sentiment.

The U.S. currency has been on a tear as soaring inflation, recession fears, and worries over central bank policies across the globe hit risk appetite.

The dollar is likely to keep rallying until the current slowdown in the global economy is over and growth starts to accelerate again, according to Citigroup.

“What we think is needed for a dollar top is a bottom in global growth,” analysts at the bank said. “There needs to be a narrative shift in order to change the trajectory of the dollar.”

Elsewhere, GBP/USD fell 0.2% to 1.1303 after having gained sharply overnight on reports of a possible U-turn by the U.K. government on its plans for hefty unfunded tax plans.

Finance minister Kwasi Kwarteng cut short his trip to Washington late Thursday amid reports Prime Minister Liz Truss is considering reversing more of her government’s controversial “mini-budget.”

The U.K. bond market, and sterling, was hit hard by the plans to fund massive tax with borrowing, resulting in the Bank of England stepping in to restore calm, announcing an emergency bond-buying program which is set to end later Friday.

EUR/USD traded flat at 0.9773 after Germany’s wholesale price index surged in September, rising 19.9% on the year and 1.6% on the month, driven mainly by higher costs for raw materials and intermediate products.

This follows data released Thursday showing the country’s consumer inflation data climbing 10.9% higher year-on-year when harmonized to compare with other European countries, putting more pressure on the European Central Bank to continue hiking interest rates.

USD/JPY rose 0.2% to 147.47, just below the 32-year peak of 147.66 seen in the previous session, meaning investors remain on intervention watch with Japanese authorities expected to prop up the fragile currency.

AUD/USD rose 0.5% to 0.6331, while NZD/USD climbed 0.7% to 0.5669, with both currencies benefiting from the increased risk sentiment.

USD/CNY rose 0.1% to 7.1773 after data showed Chinese CPI inflation rose to its highest level since April 2020, but PPI inflation contracted in September, reflecting continued weakness in China’s COVID-struck manufacturing sector this year.