Sterling traded on a soft footing against the dollar during Thursday's Asian session, hovering below the 1.3600 handle and remaining close to this week's low territory. The greenback has held onto a degree of strength following the release of U.S. inflation data, which has kept pressure on the pound, though the market has yet to embrace a strongly bearish outlook for the currency pair. Investors are treading more cautiously at this stage, preferring to wait for further clarity on the Federal Reserve's interest rate trajectory before establishing fresh directional positions.
The U.S. personal consumption expenditures price index for July rose 3.7% year over year, matching the prior month's reading but edging above the 3.6% that analysts had penciled in. Core PCE inflation remained steady at 3.3% on an annual basis, while both headline and core measures increased roughly 0.2% on a monthly basis. Overall, U.S. inflation remains well above the Fed's 2% long-term objective, and the pace of cooling is insufficient, leaving the market to keep alive the possibility of further policy tightening from the central bank before the year is out.
For the pound-dollar pair, U.S. rate expectations are the most immediate source of downward pressure. Should the market conclude that the Fed will need to hold borrowing costs higher for an extended period, or even hike again, both Treasury yields and the dollar could find support, which in turn would weigh on cable. This is especially relevant given that sterling has already pulled back from recent gains, and a renewed widening of the dollar's rate advantage would add to the pair's near-term downside risk.
That said, the dollar's current advance faces notable constraints. The U.S. Treasury has been actively pursuing a strategy of repurchasing long-dated debt, buying back a portion of longer-term securities to ease supply pressures and thereby putting a lid on long-end yields. If those yields cannot sustain an upward move, the dollar's yield advantage may be limited even if U.S. inflation stays elevated. Meanwhile, there are early signs of de-escalation in the Middle East, with market expectations growing for a temporary arrangement between Washington and Tehran and increasing discussion about the resumption of commercial shipping through the Strait of Hormuz. The resulting drop in safe-haven demand has led to some retracement of the risk premium the dollar had previously accumulated, which is another factor capping the pound's losses.
However, it is worth noting that these shipping-related talks do not imply the geopolitical threat has been fully neutralized. Iranian officials have indicated that the strait can only return to full navigation if the U.S. follows through on its commitments. This means risks to energy transport remain, and crude prices continue to carry a certain risk premium. If energy costs climb once more and stoke global inflation expectations, markets could again raise their assumptions about major central banks maintaining restrictive policies, which would have a complicated effect on the dollar.
On the UK side, the pound's own performance is also being shaped by domestic economic conditions and expectations for the Bank of England's policy path. If UK inflation and wage pressures stay elevated, the scope for the BoE to cut rates will be constrained, providing the pound with some interest rate support. Conversely, if British economic data clearly deteriorates and markets rebuild their bets on easing, sterling could face even greater headwinds.
Attention is now gradually shifting toward the Jackson Hole global central bank symposium. Fed Chair Kevin Warsh is slated to speak on Friday, and his assessment of inflation, employment, and the future rate path will have a direct bearing on the dollar's trajectory. If Warsh delivers a decisively hawkish message, underscoring that inflation risks remain elevated, the pound-dollar pair could come under additional pressure. If he instead emphasizes slowing growth and the flexibility to adjust policy going forward, the dollar might give back some of its gains, opening the door for a sterling rebound.
Given this backdrop, it would be premature to conclude from the PCE data alone that the dollar is set to climb steadily. U.S. inflation stickiness does raise the bar for the Fed to keep rates high, but the Treasury's buyback program is capping long-end yields, and diminished safe-haven demand is also limiting the dollar's upside. As a result, the pound-dollar pair is more likely to wait for a fresh policy catalyst to confirm its next directional move.
On the daily chart, the pound-dollar pair has entered a corrective phase after its recent rebound and is currently facing resistance from the 1.3660–1.3665 supply zone. That area represents a key hurdle for the bulls to reclaim control. A decisive break and sustained hold above 1.3665 would signal that near-term correction pressure has eased considerably, paving the way for a retest of 1.3700 and potentially higher levels. To the downside, the prior consolidation zone near 1.3450 offers intermediate support, while the 1.3300–1.3350 region is a more significant medium-term demand area. If the pair continues to drift lower but attracts buying within these zones, the broader medium-term rebound structure could remain intact. Conversely, a clear break below 1.3300 would warrant caution that the pair is shifting from a pullback into a deeper trend reversal.
On the 4-hour chart, the pound-dollar pair is showing short-term weakness, trading below the 1.3600 mark, indicating that sellers currently hold the upper hand. That said, with the price approaching a prior support zone, the downside momentum may begin to fade. If the pair can reclaim 1.3600 and push through the 1.3660–1.3665 area, while the MACD indicator turns from weak to strong, a return to a rebound phase in the near term would become plausible.
In summary, the pound-dollar pair is caught between persistent U.S. inflation and declining safe-haven demand for the dollar. The July PCE reading of 3.7% year over year, with core at 3.3%, keeps the door open for further Fed tightening and lends support to the greenback. However, the Treasury's long-dated bond repurchases are suppressing yields, and signs of easing tensions in the Middle East are curtailing the dollar's upside. The real short-term swing factor remains Fed policy expectations. If the Jackson Hole gathering delivers hawkish signals, the dollar could maintain its edge and the pound-dollar pair would face additional downside. If the policy stance proves less hawkish than anticipated, the dollar could retreat and sterling may find renewed buying interest. For now, waiting for a breakout at key technical levels is a more prudent approach than chasing moves in the middle of the range.
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