US Inflation Moves Reverse, While the Pound Rises Following GDP Data

February 15, 2025 - Written by David Woodsmith

STORY LINK US Inflation Moves Reverse, While the Pound Rises Following GDP Data

Wednesday’s CPI-inspired moves have mostly reversed and the US dollar is surprisingly lower since the release.

The pound is the best-performing G7 currency on Thursday, with a +0.4% gain against the USD.

GDP data for December and Q4 was better than expected, although the figures were still weak and won’t alter the BoE’s plans to cut rates.

Wednesday's CPI release in the US smashed estimates with a 0.5% monthly reading, taking the yearly figure to 3.0%. A 3% print has not been seen since June last year and dominated headlines. Not only that, core CPI also came in higher than expected and rose from 0.2% to 0.4%. Even that figure flatters as the unrounded figure was 0.45%.

Despite all this, the S&P500 reversed sharply off its 50sma at 6003 and recovered back into Tuesday's range to close at 6052. The dollar closed flat. Only the move higher in yields was "logical" and sustained. This all begs the question, "Why?" Was the data not as significant as it seems?

The short answer is, "no." This data confirms the market and Fed worries. This can no longer be described as a "bump." However, it is worth noting that CPI and other data strengthened at the beginning of 2023 and 2024 too. It faded by Q2 both times. Another reason might be that stocks performed well under the high inflation and high growth environment as seen in 2023 and 2024. It may not be the threat that most assume. Lastly, higher inflation has already been priced in by the US dollar and by yields. The significant rally in September and October anticipated a Trump presidency with tariffs and inflationary policies. This week’s data only confirmed what the market foresaw many months ago.

The dollar is lower on Thursday despite CPI essentially putting rate cuts on the backburner until the summer. EURUSD is +0.32% and GBPUSD is the strongest G7 currency with a gain of 0.4% following the release of GDP growth data.

Pound Boosted by Data

Thursday’s GDP data was expected to come in weak. Estimates were for a MoM figure of 0.1% which would have led to a Q4 reading in negative territory. However, the MoM December reading came in higher at 0.4% which pulled the quarterly print to 0.1%.

This is still low, but it could have been a lot worse and suggests the market’s and BoE’s forecasts could be too gloomy. Earlier this week, BoE MPC member Catherine Mann explained that she voted for a 50bps cut in the last meeting "against a backdrop of surprisingly weak economic activity in the second half of 2024 along with a modest further loosening in the labour market."

This week’s data does not completely invalidate this view. December’s data may have been better than expected, but there were plenty of concerns in the quarterly picture. As ING explain:

" The UK economy grew by 0.1% in the final quarter of 2024, though only because of a surge in inventories. These are a notoriously volatile accounting fixture which, unlike other parts of the GDP breakdown, don't tell us much about the underlying health of the economy. The areas that do – household consumption, exports, and business investment – were all flat or negative. The latter was a particular disappointment, falling by more than 3% in Q4, having outperformed many other economies earlier in the year.”

Another concerning point is that almost all the GDP growth in 2024 was down to a rise in the population. GDP per capita actually fell. Concerns over slowing growth are therefore still valid and there is nothing to suggest the BoE will delay further cuts due to confidence in the economy. Any strength in the pound towards the end of the week is therefore only likely to be temporary.

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TAGS: American Dollar Forecasts Pound Dollar Forecasts