US inflation shock weakens dollar as Fed appears to be imposing sharp rate hikes and urges BoE for another 0.5% hike
Central banks in London and Washington appear poised to impose more sharp rate hikes next week after figures on both sides of the Atlantic showed inflation pressures are not going away.
The dollar rose after US inflation data for August came out higher than expected at 8.3 percent yesterday.
In the UK, figures showing the unemployment rate falling to 3.6 percent, the lowest level since 1974, point to a tight labor market as sought-after workers push for higher wages.
Balancing Act: The US Federal Reserve (pictured) and the Bank of England will focus on trying to calm rampant inflation when they announce interest rate decisions next week
The US Federal Reserve and Bank of England will focus on trying to calm rampant inflation when they announce interest rate decisions on Wednesday and Thursday next week.
Markets started to gain 0.75 percentage points for both. That could mean a trio of big increases in September after the European Central Bank also picked a three-quarters point rally last week.
Neil Wilson, chief market analyst at Markets.com, said the US numbers “failed to live up to hopes that it would show a real sign of inflationary pressure slowing” and pointed to the Fed’s “long hiking cycle”.
Michael Hewson, chief market analyst at CMC Markets, said the inflation numbers “rocket under the dollar.”
The pound fell again during a volatile session from a two-week high of more than $1.17 to $1.1498.
The euro fell to $0.9971. Equity markets have turned red as the prospect of more sharp increases in US interest rates put pressure on borrowers.
The FTSE 100 index gave up its early gains to fall by 1.2 percent, or 87.17 points, to 7385.86, while the Dow Jones Industrial Average on Wall Street fell by about 4 percent, and the Standard & Poor’s index fell by more than 4 percent, while the index fell Standard & Poor’s by more than 4 percent. Nasdaq fell more than 5 per cent.
The Fed raised interest rates to combat inflation, which hit a four-decade high of 9.1 percent in June. The August reading of 8.3 percent decreased from 8.5 percent in July. But it was higher than the expected 8.1 percent.
Crucially, the “core” inflation rate – excluding volatile energy and food prices – rose from 5.9 percent to 6.3 percent amid rising rent and healthcare costs.
In the UK, the Bank of England has made it clear that it will continue to raise interest rates to try to bring down inflation, even if it leads to dire consequences.
Today’s official figures are expected to show that inflation remains elevated after reaching 10.1 percent in July.
UK figures yesterday showed that the share of working-age people in the workforce due to long-term illness has reached its highest level since 2005.
A smaller workforce is likely to add to wage inflation pressures as employers look to hire new employees.