US dollar rallies but the pound holds firm

The GBPUSD pair shot to one-week highs, around the 1.3470-75 region in reaction to hotter UK consumer inflation figures, albeit quickly retreated a few pips thereafter. The pair was last seen trading just above mid-1.3400s, still up around 0.25% for the day.

Having shown some resilience below the 1.3400 mark on Wednesday, the GBPUSD pair attracted fresh buying amid some US dollar profit-taking from a 16-month peak. The intraday buying picked up pace following the release of stronger UK CPI print, which surpassed expectations and accelerated to a 4.2% YoY rate in October.

The dollar rose to a 16-month high on Tuesday after data showed U.S. consumers looked past rising prices and drove retail sales higher than expected last month, while the euro slumped amid growth concerns and a surge in COVID-19 cases in Europe.

U.S. retail sales rose 1.7% in October, topping consensus expectations of a 1.4% rise, likely as Americans started their holiday shopping early to avoid empty shelves amid shortages of some goods as the ongoing pandemic squeezes supply chains.

The euro extended losses versus the dollar, last down 0.43% at $1.13175. Earlier in the session, the single currency dropped to $1.1315, its weakest since July 2020.

COVID-affected Eurozone

European Central Bank President Christine Lagarde on Monday said that tightening monetary policy now to rein in inflation could choke off the euro zone’s recovery, comments which were viewed as pushing back on calls and market bets for tighter policy.

The euro’s decline reflects the disappointing performance of the eurozone economy relative to the United States, which has been surprising on the upside more than the eurozone has been, said Marshall Gittler, head of investment research at BDSwiss Holding Ltd.

COVID-19 is also surging again in Europe, which causing some countries to contemplate lockdowns again, whereas the spread of the virus seems to have stabilized for now in the United States, he said.

“As a result, the market is getting increasingly nervous about the euro,” Gittler said.

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