US dollar flirts with new multi-month lows

The US dollar slumped on Tuesday as it was undermined by falling US Treasury yields and an uptick in risk appetite.

Meanwhile, the pound opens today’s session on the defensive, with GBP/EUR slumping to €1.1539, and GBP/USD tumbling to $1.2651. GBP/CAD has plunged to CA$1.6883, while GBP/AUD and GBP/NZD plummet to AU$1.8687 and NZ$2.0138, respectively.

Coming up, will a larger-than-expected drop in UK inflation leave Sterling on the back foot through today’s session?

What’s been happening?

The US dollar was placed on the defensive yesterday, with the currency falling in tandem with US Treasury yields.

This drop in Treasury yields comes as USD investors continue to price in an expected March interest rate cut from the Federal Reserve.

Reinforcing the US dollar’s losses was a prevailing risk-on mood, which saw investors favour higher-yielding currencies.

While it benefitted from its negative correlation with the US dollar, the euro was mostly muted on Tuesday amid the waning demand for safe-haven assets.

In contrast, the improving market mood helped to strengthen the increasingly risk-sensitive pound during yesterday’s session. Sterling also continued to be supported by the Bank of England’s (BoE) recent hawkish bias.

What’s coming up?

Kicking off today’s session was the publication of the UK’s consumer price index.

The CPI figures reported inflation cooled from 4.6% to 3.9% in November, missing forecasts for a more modest drop to 4.4%.

The weaker-than-expected inflation figures are weighing heavily on the pound this morning amid speculation this could place some pressure on the BoE to begin cutting rates a little earlier than it previously thought.

Also released at the start of today’s European session was Germany’s latest consumer confidence index.

A stronger-than-expected improvement in consumer sentiment this month looks to be lending support to the euro at the start of today’s session. Although this upside is capped by a lacklustre producer price index.

Meanwhile the US will publish its own consumer confidence figures later this afternoon. December’s figures may reflect positively on the US dollar if they report an improvement in sentiment.