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Pound Sterling advances against Dollar after PPI inflation undershoots expectations.
The pound to dollar exchange rate (GBP/USD) rose to 1.3555 (+0.22%) after a key measure of inflation rose by less than many expected in August, boosting hopes for a run of interest rate cuts at the Federal Reserve.
The U.S. producer price index (PPI) rose 2.6% year-on-year in August, representing a significant undershoot of the 3.3% that markets expected. The previous month's reading was also lowered, to 3.1%.
In fact, PPI shrank by 0.1% month-on-month in August, which defied the expected growth of 0.3%, while representing a sharp slowdown on July's 0.7% growth.
"Wholesale prices in the US unexpectedly fell in August, adding fresh momentum to bets that the Federal Reserve will cut interest rates next week, with markets now focused on tomorrow’s consumer price index for the final confirmation," says Nigel Green, chief executive of deVere Group.
"The dollar weakened against major peers, while risk-sensitive currencies such as the Australian and New Zealand dollars advanced," he adds..
PPI measures costs facing producers, who tend to pass a portion of their costs onto consumers, meaning it offers an insight into the early stages of the price pipeline.
The undershoot in expectations suggests the feared rise in prices caused by U.S. import tariffs is still yet to materialise in a meaningful manner.
The Federal Reserve has meanwhile indicated it is increasingly concerned about the deteriorating labour market, suggesting it stands ready to provide support via interest rate cuts.
Above: GBP/USD at 15-minute intervals.
This lowers short-term U.S. bond yields, which typically translates into a weaker Dollar.
The PPI undershoot will prime markets for a similar below-consensus reading in Thursday's marquee data event, the CPI inflation report.
Here, the expectation is for a 2.9% y/y figure.
We would look for post-PPI gains in GBP/USD to fade as markets prepare for this more impactful publication.