Pound Gains as Inflation Miss Weighs on Dollar Expectations

The Pound-Dollar exchange rate surged on Wednesday after the US inflation data fell short of expectations. The core Personal Consumption Expenditures (PCE) price index came in at 3%, lower than the forecasted 3.3%. This led to a repricing of Federal Reserve rate expectations, with CME's FedWatch tool showing odds of an October hike dropped to 37% from over 70% earlier in the week.

The weaker-than-expected inflation data overshadowed the latest US GDP figures, which showed growth revised higher in the second quarter. In contrast, the UK's own second-quarter GDP figures came in ahead of initial estimates, with quarterly economic growth revised up to 0.5%, compared to a previous estimate of 0.4%. This stronger-than-expected performance may strengthen expectations that the Bank of England will restart its hiking cycle following its November policy meeting.

Looking ahead to Thursday's session, the next catalyst for movement in the Pound-US Dollar exchange rate is likely to be the publication of the latest ISM manufacturing PMI. If September's index points to further expansion in the US factory sector, it may offer fresh support to the US Dollar. However, any movement in the US Dollar may ultimately be limited on Thursday as USD investors brace for Friday's more influential non-farm payroll data.