GBP Weakens as PCE Beats Forecasts, USD Gains Ground

The British Pound (GBP) weakened against the US Dollar (USD) on Wednesday after the latest Personal Consumption Expenditures (PCE) Price Index data revealed a stronger-than-expected headline reading. The GBP/USD pair fell to a five-day low, trading around 1.3603, down roughly 0.33% on the day.

The PCE Price Index rose 0.2% month-over-month in July, above the 0.1% forecast and reversing the 0.1% decline recorded in June. Annual headline inflation held steady at 3.7%, exceeding market expectations of 3.6%. Core PCE Price Index, the Federal Reserve's preferred measure of underlying inflation, increased 0.2% month-over-month, matching forecasts but accelerating from June's 0.1% rise.

The hotter-than-expected headline readings helped the US Dollar regain some ground after its recent weakness, triggered by the US Treasury's surprise announcement to increase buybacks of longer-dated government securities. The US Dollar Index (DXY) trades around 99.12, up 0.20% on the day.

However, traders placed greater weight on the in-line core readings, combined with relatively moderate July Consumer Price Index (CPI) and Producer Price Index (PPI) figures, suggesting that underlying inflation pressures remain contained despite elevated oil prices. Markets are pricing in a 65% chance that the Fed will leave interest rates unchanged at its September meeting.

Strategists at Scotiabank note that the Pound is consolidating within an incredibly tight range in the mid-1.36s, with price action constrained by limited data release calendar and a period of quiet BoE policymakers. They caution that fiscal risk will remain elevated into the fall as we look to the Autumn Statement scheduled for release on October 28.