The Dollar experienced its largest daily decline in a month after the US reported a decrease in inflation last month, reinforcing the expectation of an interest rate cut by the Federal Reserve in September.

The Pound to Dollar exchange rate surged past the 1.29 mark, reaching a new high for 2024 at 1.2935, after US CPI inflation showed a month-on-month decline of 0.1% in June, down from 0% in May and below the expected 0.1% increase.

“Turbo-charging the Pound’s recent uplift was data showing US inflation cooled last month, boosting bets of more Fed rate cuts this year and next,” according to George Vessey, Lead FX Strategist at Convera.

Money market pricing indicates that the likelihood of a September interest rate cut by the Fed is now considered almost certain, following a drop in the headline inflation rate to 3.0% year-on-year from 3.3%, falling short of the expected 3.1%.

The key core inflation rate dropped to 3.3% year-on-year from 3.4%, with a month-on-month increase of just 0.1% in June. This is below the anticipated 0.2% and the previous month's 0.2%.

“The June CPI report was very benign. Within the core component, the long-awaited slowing in both tenants' and owners' equivalent rental inflation took place last month as the monthly increase skitted to low-side 0.3% increases after running around 0.4% increases much of the prior six months,” said Michael Feroli, a JP Morgan economist.

Additionally, airfares and energy prices exerted notable downward pressure on inflation.

“The figures add to the body of evidence pointing towards a September rate cut, following last week's softer-than-expected June jobs report, and coming after Chair Powell's Congressional testimony earlier this week, in which Powell struck a more cautious tone, noting how the economy is no longer 'overheated' and that the jobs market is 'fully' back in balance,” stated Michael Brown, Senior Research Strategist at Pepperstone.

“In light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face,” Powell commented in an opening statement to a two-day Senate hearing.

His assessment indicates that the Fed may lower interest rates before inflation returns to the 2.0% target. The June figures will likely make the Fed more confident in pursuing this approach.