Pound Reverses Gains as Strong US Inflation Data Lifts Dollar

The British pound erased its earlier gains against the U.S. dollar on Thursday, pressured by stronger-than-expected U.S. inflation data that bolstered the greenback. The currency's retreat occurred alongside a similar move in the euro, which also fell after the European Central Bank delivered an expected interest rate hike.

U.S. Inflation Data Fuels Dollar Rally

The dollar gained traction after a report showed the U.S. Producer Price Index (PPI) for final demand accelerated to 5.4% on an annual basis in August, exceeding the market consensus of 5.3%. The monthly increase of 0.4% was in line with expectations, according to data from Investing.com.

Surging energy costs were a primary driver, with diesel fuel prices jumping 24.1%. The report noted that energy prices accounted for over three-quarters of the monthly increase in goods prices. This data provides further support for the Federal Reserve to maintain a cautious stance on monetary policy ahead of its next meeting.

Sterling Retreats from Multi-Week High

Prior to the U.S. data release, the pound had climbed to its highest level since August 29. However, the GBP/USD pair later fell 0.33% to trade at 1.3500 as of 9:20 AM ET.

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Sterling's initial strength was supported by growing market bets that the Bank of England will need to implement at least two more interest rate hikes by March to combat inflation. This outlook is complicated by soaring energy prices, with Brent crude trading above $105 per barrel, which simultaneously fuels inflation and threatens to slow economic growth.

ECB Hikes Rates but Euro Slips

In a widely anticipated move, the European Central Bank (ECB) raised its three key interest rates by 25 basis points. While the central bank also revised its inflation forecasts higher, it refrained from committing to a specific path for future rate increases.

Following the announcement, the euro briefly rallied before reversing course. The EUR/USD pair was last seen down 0.25% at 1.1601, as investors assessed the central bank's updated outlook.

According to analysis from ING, the dollar is likely to remain supported by external factors like rising oil prices and weaker equity markets. The firm suggested that a repricing of the European interest rate curve could open the door for EUR/USD to test the 1.1600 level and potentially move toward 1.1500 within a month.