The pound fell below $1.34 on Tuesday after hotter-than-expected United States inflation data lifted the dollar and strengthened bets that the Federal Reserve will raise interest rates again in December.

Sterling was down 0.3 per cent at $1.3395, according to Reuters, having traded as low as $1.3391 during the session. FXStreet reported the pound down more than 0.40 per cent against the dollar, trading at $1.3396, after ranging between $1.3346 and $1.3459 through the day. The pound was also slightly lower against the euro, at 83.51 pence.

Dollar strengthens as rate bets shift

The US Bureau of Labor Statistics said consumer prices rose 0.4 per cent in October from the previous month, above the 0.3 per cent rise economists had forecast. Core prices, which strip out food and energy, rose 0.3 per cent, above the 0.2 per cent forecast, matching the pace of the previous two months.

The dollar index, which measures the greenback against a basket of currencies, rose 0.6 per cent to 102.29, Reuters reported, with the euro down 0.56 per cent at $1.1156. UK 10-year gilt yields rose to 5.18 per cent as bond markets repriced the outlook for interest rates.

Federal Reserve Governor Christopher Waller had argued earlier in the day, speaking in London, that the US economy was strong and the labour market stable, but that inflation was too high. He said a half-point rise in December would be warranted if core inflation came in at 0.3 per cent, which is what the data showed. According to the CME FedWatch tool, the odds of a quarter-point rise in December stood at 85 per cent after the figures, while 55 per cent also expected another increase in January.

Sterling gives back Monday's gains

The fall reversed part of Monday's rally, when the pound had risen close to 0.7 per cent as falling oil prices and easing worries about artificial intelligence and the Middle East weighed on demand for the dollar and investors turned slightly more willing to take risks.

Bank of England Deputy Governor Clare Lombardelli also struck a hawkish tone in London on Tuesday, adding to pressure on sterling as traders weighed the outlook for rates on both sides of the Atlantic. The Bank of England raised interest rates to 4 per cent last week in a unanimous 9-0 vote by its Monetary Policy Committee, and markets have been pricing in the chance of a further rise at its meeting on 17 December.

UK growth data next

Investors will now watch Britain's latest gross domestic product figures, due on Thursday. A Reuters survey of economists forecasts growth of 0.7 per cent in the third quarter compared with the previous three months, which would be a pick-up from the previous period.

For sterling, the $1.34 level is the marker traders are watching. The pound traded below its 100-day moving average at $1.3395 during the session, and a sustained move lower would put the focus on $1.3350, the level from which it rebounded last week. A softer reading in Friday's US producer price data, or calmer signals from Federal Reserve officials, could steady the currency, but for now the hotter inflation figures have handed the dollar the upper hand.