In the last couple of weeks, we have seen much written about how the Federal Reserve may act in the coming months to tackle rising inflation.

Yesterday, the US Bureau of Labor Statistics published one of the key measures of inflation, the Consumer Price Index (CPI), for December. CPI increased 0.5% from the previous month and a whopping 7% in the 12 months leading up to December. This represented the largest year-on-year increase in CPI since 1982.

Photo by Toa Heftiba on Unsplash

However, despite being at its highest level in almost four decades, the figures were in line with what was expected and had, therefore, already been factored into the prices of many assets.

In fact, Wall Street actually seemed to breathe a sigh of relief that the latest data had not been even higher than expected. Many stocks rose, with the main US indices all closing the session with moderate gains.

There had been speculation that, if inflation data had come in much worse than anticipated, the Federal Reserve could be forced into acting more quickly and raising interest rates sooner than anticipated. As things stand, given yesterday’s figures, there are growing expectations that the Fed will start raising rates in March.

In response to the data, the US dollar index – which measures the USD against six of its rival currencies – fell by 0.6%, closing at its lowest level since mid-November and continued to fall on Thursday morning.

Sterling, on the other hand, continued to rally as traders believe that the UK economy can shrug off an Omicron inspired surge in Covid-19 cases and that the Bank of England (BoE) may hike rates again at their next meeting in February.

Since hitting 12-month lows in December, GBP/USD has rallied almost 6%, an upward trend which was kick-started by the BoE raising their own interest rates in December for the first time in more than three years.

On Thursday morning, the currency pair continued to rise for the third consecutive day, hitting its highest level since 29 October. However, it should be noted that the RSI indicator has now strayed into overbought territory, meaning that bulls should remain cautious of a potential pullback.

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Depicted: Admirals MetaTrader 5 – GBPUSD Daily Chart. Date Range: 24 May 2021 – 13 January 2022. Date Captured: 13 January 2022. Past performance is not a reliable indicator of future results.

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Depicted: Admirals MetaTrader 5 – GBPUSD Weekly Chart. Date Range: 19 July 2015 – 13 January 2022. Date Captured: 13 January 2022. Past performance is not a reliable indicator of future results.