FX roundup: Sterling softens on surprise UK inflation drop; US rates in focus

Sterling was lower across most of the board on Tuesday afternoon, its spiral south sparked by an unexpected fall in UK consumer prices earlier in the session.

At 16:48 GMT, sterling was down 0.6% to $1.2415 and down 0.53% to €1.1571. The dollar-spot index was flat at 100.110, with the greenback mixed on major crosses.

Sterling also fell against emerging-market currencies the Australian, Canadian and New Zealand dollars, as well as South Africa's rand and Japan's yen.

Office for National Statistics said month-on-month, consumer price index (CPI), a gauge of inflation, rose 0.1% in October. This on September's 0.2% rise and consensus for a 0.3% surge.

ONS said a large jump in input prices was not yet being reflected on the UK high street. The market expects shop prices to rise after UK's Brexit vote in June to quit the EU.

Core UK CPI, which strips out more volatile prices like food and fuel, rose 1.2%, which was again short of the 1.4% consensus estimate and down from the prior month's 1.5% rise.

"Despite October's inflation rate showing a fall there is no doubt that inflation will be on a rising trend over the next few quarters," said Mark Dampier, head of investment research at Hargreaves Lansdown.

Rising input prices indicated goods would be more expensive in 6-12 months' time, Dampier said.

"The reality is that the forecasts for inflation to peak at around 4% are just educated guesses. A more important question to ask is will rising inflation cause the Bank of England to raise rates? I think it is unlikely."

Jasper Lawler, market analyst at CMC Markets, said sterling's broader 15% drop -- the currency humbled by the Brexit vote -- would take time to make its way through the supply chain.

"Should data later this week show wages are stable, the outlook in the medium term for the UK economy should be robust," Lawler added.

IG market analyst Joshua Mahony added that CPI's pullback from Bank of England's 2% target gave the central bank's Monetary Policy Committee room for manoeuvre in the coming months.

"Today's appearance from (BoE governor Mark) Carney saw the governor speculate on the notion that we should see the mandate revised regularly, providing a hint that he would be willing to ease further if it wasn't for the 2% inflation target," Mahony added.

Turning to the US dollar, it rose 0.05% to €0.9319, also stacking on gains versus the aussie, kiwi and yen, but falls against the loonie and rand.

The US dollar enjoyed a boost this afternoon after Boston Federal Reserve president Eric Rosengren encouraged recent speculation that the US Fed would raise rates in December.

Rosengren said that in the absence of "significant negative economic news over the next month (market pricing for the odds of a December rate move) seems plausible."

He continued: "I would much prefer that tightening be gradual, and that policymakers try to avoid circumstances in which we need to tighten more quickly," he added.

Finally, Dampier commented that the US tended to be the lead economy in the world so sudden changes there and rate rises could be followed by other countries in due course.

"Yet I think this is unlikely in Europe and the UK which trail well behind the US in terms of economic progress since the financial crisis of 2008. Even in the US it is by no means certain that rates will rise in 2017."