The US dollar has rallied this afternoon after US inflation figures came in higher than expected.

The data showed a year-on-year increase in US prices of 8.6% versus an expected 8.3%, and a whopping 1% month-on-month. This has pushed up interest rate forecasts for the US, with the market now expecting base rates to be at 3% by the end of this year. This is the last major data point before next week’s Federal Reserve interest rate meeting and it has led to increased demand for the USD. It’s worth noting that US petrol prices touched new highs yesterday, so further price rises look to be coming down the line, which is only going to give the Fed further headaches.

Yesterday the ECB said they were likely to raise rates by 0.25% in July, which would be their first rate rise since the pandemic began. However, they didn’t give markets confidence they would hike by another 0.5% at their September meeting which, along with downgraded growth forecasts, caused the Euro to lose ground. There’s a lot of concern that central banks are going to hike interest rates up so much that it will tip their economies into recession, but with such spiralling prices (and having to play catch up) their hands are being forced. The Eurozone economy could be particularly vulnerable to this as it might trigger another sovereign debt crisis, particularly with the more indebted economies in the Bloc.

As a result, the GBP/USD has fallen nearly 1.35% today and trades at a 3-week low. The EUR/USD has fallen 2-cents from yesterday’s high and now trades at a 3-week low. The GBP/EUR continues to trade within a relatively tight range (roughly 1-cent range).

Next up we have UK growth data on Monday and the all-important Federal Reserve and BoE interest rate meetings next Wednesday and Thursday respectively. So, things could remain volatile well into next week.