Quick Facts
- US Consumer Price Index (CPI) surges to 3.0% in August, highest since November 1990
- President Trump announces talks with Russia to ease tensions over Ukraine, boosting risk assets and British Pound
- Federal Reserve Chair Jerome Powell warns that central bank still has work to do to curb inflation, but hints at holding interest rates steady through 2025
Forex Today: Risk Sentiment Improves on Russia Talks Despite Higher US Inflation
The US Consumer Price Index (CPI) made a surprise jump to 3.0% in August, marking the highest reading since November 1990. However, the news was overshadowed by President Trump’s announcement of talks with Russia to ease tensions over Ukraine, which boosted risk assets and lifted the British Pound. Meanwhile, Federal Reserve Chair Jerome Powell warned that the central bank still has work to do to curb inflation, but hinted that interest rates will remain on hold through 2025.
US Inflation Surges, But Risk Sentiment Improves
The August CPI report showed a bigger-than-expected 0.4% rise in prices, driving the year-over-year increase to 3.0%. This is a significant jump from the 2.3% reading in July and marks the highest level since November 1990. While this news may spark concerns about inflation and its potential impact on the economy, the market reaction was relatively muted.
The reason for this lack of panic is that the inflation surge was largely driven by food and energy prices, which can be volatile and temporary. Additionally, the core CPI, which excludes food and energy, rose by a modest 0.2%, indicating that underlying inflation pressures remain contained.
More importantly, President Trump’s announcement of talks with Russia to resolve the Ukraine crisis via Twitter sent risk sentiment soaring. This unexpected development has lifted optimism about the global economy, leading to a rally in stocks and a decline in volatility.
British Pound Soars on Strong UK GDP Data
The British Pound gained significantly against the US Dollar, yen, and euro, driven by surprisingly strong UK GDP data for the second quarter. The preliminary estimate showed a 0.4% quarter-on-quarter increase, beating market expectations of 0.2%. This reinforces expectations of a robust economic recovery in the UK, which has been fueled by the country’s exit from the European Union.
The Pound’s strength was also supported by comments from BoE Governor Andrew Bailey, who hinted that interest rates may rise sooner than expected to curb inflationary pressures. This has led to a widening yield curve, with expectations that the UK 10-year gilt yield will increase to around 1.5% by the end of the year.
Fed Chair Powell’s Hawkish Stance
In a speech at the Jackson Hole Symposium, Federal Reserve Chair Jerome Powell acknowledged that the US economy has made significant progress since the financial crisis. However, he emphasized that the central bank still has work to do to ensure that inflation remains within target bounds.
Powell’s comments were generally seen as hawkish, suggesting that the Fed may not move aggressively to cut interest rates in response to inflationary pressures. This has led to a flattening of the US treasury yield curve, with expectations that the Fed will hold interest rates steady through 2025.
Forex Market Implications
The surprise hike in the US CPI and the uncertainty surrounding the impact on the economy have led to a mix of reactions in the forex market. The US Dollar remains weak against the British Pound and other risk-sensitive currencies, such as the Australian and Canadian Dollars.
The Euro has also rallied against the US Dollar, driven by the easing of global tensions and the rally in stocks. This has led to a widening of the European yield curve, with expectations that the Eurozone 10-year bond yield will increase to around 0.5% by the end of the year.
