Sterling reversed its initial weakness that followed U.S. CPI weakness, rising 0.32% to 1.3632 from its U.S. session low at 1.3590 and remained well bid and likely to continue its drift higher on the UK rate outlook.
Short-sterling 0#FSS: and U.S. Eurodollar futures 0#ED: indicates the UK and U.S. are moving in the same direction, with the BoE seen hiking by Q1 2022 and the Fed's first 25bp hike now priced in by Sept.
The shift in Fed rate hike expectations is having a more muted effect on the dollar as traders reduce USD longs after CPI, which did not surprise significantly to the upside, and prepare for the Fed minutes from the Sept.
22 FOMC meeting.
Investors will scrutinize the release for hints the Fed is shifting its inflation expectations from a transitory outlook to a more entrenched view, which may pull forward rate hikes in 2022 FEDWATCH.
A close above 21-DMA resistance at 1.3630 would open the way for a test of key 50% Fib resistance at 1.3663, above which bulls could target the 100-day moving average by 1.3741 and the thin daily cloud by 1.3780.
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