British Pound Weakens Against US Dollar As Headline PCE Beats Forecasts

• GBP/USD drops to a five-day low following the release of US PCE data.

• Headline inflation exceeds forecasts, while core PCE comes in as expected.

• Traders now await Fed Chair Kevin Warsh’s Jackson Hole speech on Friday.

GBP/USD falls to a five-day low on Wednesday as traders react to the latest United States (US) Personal Consumption Expenditures (PCE) Price Index data. At the time of writing, the pair trades around 1.3603, down roughly 0.33% on the day.

The headline PCE Price Index rose 0.2% MoM in July, above the 0.1% forecast and reversing the 0.1% decline recorded in June. On an annual basis, headline inflation held steady at 3.7%, above market expectations of 3.6%.

Meanwhile, the core PCE Price Index, the Federal Reserve’s (Fed) preferred measure of underlying inflation, increased 0.2% MoM, matching forecasts but accelerating from June’s 0.1% rise. Annual core inflation stayed unchanged at 3.3%, also in line with expectations.

The hotter-than-expected headline readings help the US Dollar (USD) regain some ground after its recent weakness, which was triggered by the US Treasury’s surprise announcement that it would increase buybacks of longer-dated government securities. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.12, up 0.20% on the day.

However, the data failed to alter expectations for the Fed’s upcoming meeting as traders placed greater weight on the in-line core readings. Combined with the relatively moderate July Consumer Price Index (CPI) and Producer Price Index (PPI) figures, the data suggest that underlying inflation pressures remain relatively contained despite elevated Oil prices.

According to the CME FedWatch Tool, markets are pricing in a 65% chance that the Fed will leave interest rates unchanged at its September meeting. Attention now turns to Fed Chair Kevin Warsh’s speech at the Jackson Hole Symposium on Friday for fresh clues about the interest-rate outlook.

Pound holds mid-1.36 range as yield support fades and fiscal risks loom

Strategists at Scotiabank note that the Pound is “consolidating within an incredibly tight range in the mid-1.36s,” with price action constrained by a “limited” data release calendar and a period in which “BoE policymakers have been quiet for much of August.” They add that “yield spreads have pulled back,” eroding “a source of fundamental support for the GBP” just as the policy backdrop turns more uncertain. Looking ahead, Scotiabank cautions that “fiscal risk will remain elevated into the fall as we look to the Autumn Statement (budget) scheduled for release on October 28.”