Hot US inflation pushes pound back below 1.34

• GBP/USD falls to its lowest since late October, reversing Monday’s advance.
• The UK’s 4.00% Bank Rate would match the Fed’s floor after a December hike.
• UK growth is forecast at 0.7% for the third quarter, with figures due on Thursday.

Stronger-than-expected US inflation has prompted markets to price in a December Fed rate rise in full. The upper end of the Fed’s 3.75%-4.00% range currently matches the UK’s Bank Rate. Sterling surrendered Monday’s entire advance and slipped to just above 1.3300, its weakest since late October, before stabilising around 1.3350.

October US consumer prices exceeded forecasts after Fed Governor Waller said in London that a December increase was likely, with a half-point rise possible. Traders assign roughly 90% odds to a quarter-point hike in December and about 10% to a half-point move. In either case, the Fed’s floor would reach the 4.00% level that the Bank of England (BoE) attained only with its 5 November rate rise.

Pointing to a UK labour market in which businesses are doing little hiring or firing, BoE Deputy Governor Lombardelli said a further near-term rate rise appeared likely unless inflationary pressures eased clearly. Expectations of additional BoE tightening had already supported Sterling’s gains on Monday. Her comments therefore offered little extra support against the Dollar, which strengthened following the US data.

UK GDP and US producer prices lead the calendar

At 07:00 GMT on Thursday, UK third-quarter Gross Domestic Product (GDP) figures are expected to show growth of 0.7%, following 0.5%. September’s reading alone is forecast to be flat after a 0.1% increase. A stronger quarterly result would reinforce BoE Deputy Governor Lombardelli’s argument for a further rate rise.

Thursday also brings an appearance by New York Fed President Williams at 23:30 GMT. The October US producer price reading follows on Friday at 13:30 GMT, with a 0.4% increase forecast after September’s 1.3%. These events will inform the size of the Fed’s 9 December move rather than whether it takes place.

GBP/USD retraces more than two fifths of its advance

More than two fifths of the rise from the 14 October low just below 1.3150 to the 4 November peak near 1.3500 has now been reversed. That peak marked Sterling’s strongest level since mid-September; on 5 November, the currency again stalled at the same level.

Daily GBP/USD chart