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.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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