US Dollar Holds Up Well Despite Slight Inflation Increase Spurring Pessimism

This morning, as the week's trading begins, a small fly has landed in the otherwise very clear ointment with regard to the anticipated interest rate reductions that Western central banks could make during the early to middle parts of 2024.

Optimism ruled in the earliest days of the new year when mainstream commentary was adorned with reports suggesting that the levels of inflation that had created serious economic concerns in the United States were now under control and have been for some time, allowing the Federal Reserve Bank to possibly review its ultra-conservative monetary policy of continuing rate increases despite over a year of decreasing inflation.

Reports which take into account the inflation figures within the US economy across the entirety of 2023 are now beginning to surface, and it appears that inflation from January 2023 to December 2023 stood at 3.4%, whereas January 2023 until November 2023 showed an inflation figure of 3.1%.

Compounding this matter, the Consumer Price Index rose by 0.3% in December 2023 compared to having fallen by 0.1% in November 2023.

Whether this is enough of a blip to turn the consensus away from the Federal Reserve Bank looking at reducing interest rates during the course of 2024 is yet unknown; however, perhaps the central bank's unusually cautious approach, which was displayed during 2023, can be considered in these circumstances.

As far as reaction within the currency markets is concerned, the US dollar has not declined against other Western-market major currencies by any level significant enough to consider it related to December's inflation figures.

In Britain, a similar central bank policy - a policy of ultra-conservatism - has been implemented to attempt to curb similar levels of rampant inflation which took place two years ago and sustained itself for many months, accompanied by a high-profile 'cost of living crisis', however when looking at the value of the British pound against the US dollar this morning, the pound has not gained much ground.

Pricing according to FXOpen charts shows that on Friday, January 12, the GBPUSD pair was trading at 1.27473, whereas this morning, during the early hours of the London trading session, the GBPUSD pair was trading at 1.27419.

Indeed, at the end of December, the GBPUSD pair was trading at much higher values, passing the 1.28 barrier on December 28.

This current dynamic demonstrates that there is little concern regarding these minor changes in the direction of US inflation and that perhaps the overall market sentiment considers it to be under control in general and takes a longer-term view than just that of the past month.

Let's remember that not so long ago, inflation on both sides of the Atlantic was in double figures.

Overall, the GBPUSD pair is a steady representation of the confidence in these two large economies under current circumstances.