GBP rallies alongside improved sentimentTriggered by fall in U.S. inflationUK consumer confidence improves says YouGov

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The British Pound and Euro leapt against the Dollar following the midweek release of U.S. inflation data, and analysts say the move has the momentum to extend over coming weeks.

The Dollar was sold and stocks bought after U.S. inflation flatlined in July, taking the annual rate of increase to 8.5%, which is a deceleration from June's 9.1%, and below the consensus expectation of 8.7%.

'Risk on' currencies such as the Pound and Australian Dollar rallied alongside global stock markets, appreciating against both the Euro and U.S. Dollar, as investors scaled back their expectations for U.S. Federal Reserve interest rate hikes.

Brent Donnelly, CEO of Spectra Markets, said the U.S. inflation data surprised him, given he was expecting inflation to carry momentum through the summer, providing fundamental support for the Dollar.

"One month of data isn’t enough to just completely toss a macro view in the garbage, but it’s enough to hit the reset button and get to flat / unbiased. I am covering the GBP/USD short for a tiny, disappointing profit and will mentally write off the EUR/USD digital as a zeroburger," he says in a daily note, released following the inflation print.

Above: GBP/USD's post-CPI leap was enough to overturn recent declines and maintain the post-June rally.

Donnelly says U.S. CPI was the big event for currency markets this month, "it’s done, and I don’t think any Fed talk or equity earnings story is going to matter much until we get to Jackson Hole at least".

Should market sentiment remain supported through August the Pound can extend gains against both the Dollar and Euro, thanks to its 'high beta' status.

A currency is referred to as 'high beta' if it is sensitive to global risk appetite," says Kamal Sharma, currency strategist at Bank of America. "GBP's sensitivity to world equity market has risen... about 35% of the currency's fluctuation can be explained by changes to the equity index."

The Pound to Euro exchange rate has come off recent highs in the wake of last week's August Bank of England policy update, but downside risks are greatly reduced in an environment of improving global investor sentiment.

The pair is seen around 1.1830 on the spot market meaning bank accounts are quoting around 1.1590 and independent payment providers at 1.1790 for euro payments.

A 1.0%+ rise in the Pound to Dollar exchange rate is however more sizeable for those looking to make dollar payments: the spot rate went to 1.2250 in the wake of the U.S. inflation data, taking bank account quotes to around 1.2005 and independent payment provider quotes to 1.2213.

The dovish surprise "hit the USD directly through lower rate expectations and indirectly through rising risk appetite that a less aggressive Fed would imply," says Daragh Maher, Head of FX Strategy for the U.S. at HSBC.

HSBC remains bullish on the USD but Maher concedes that further gains will only be likely if expectations for the peak U.S. rate moves higher, something the CPI inflation print challenges.

The British Pound was meanwhile underpinned by news out Wednesday that a measure of consumer confidence had finally improved, snapping a seven month run of decline.

The two-point rise in the overall index from YouGov and the Centre for Economics & Business Research was possibly due to the UK government's cost-of-living payments, according to the survey.

Business activity also saw improvements, with employees slightly more likely to report that their workplaces are busier than they were last month and more likely to expect them to get busier in future.

"The first increase in the consumer confidence index since November 2021 provides a welcome reprieve after a torrid string of declines saw sentiment plummet by more than nine points over the past seven months," said Kay Neufeld, head of forecasting at the CEBR.

The next domestic event of importance for the Pound will be Friday's release of GDP data, where markets are expecting a contraction for the second quarter.