UOB Global Economics & Markets Research notes that US PCE inflation for July slightly exceeded expectations, helping US Treasury yields to rise and supporting the US Dollar against most G10 currencies. The DXY index posted its largest daily gain in nearly four weeks and has retraced about half of its prior losses, as markets keep alive expectations that the Federal Reserve could resume rate hikes before year-end.

DXY recovers on PCE surprise

“The headline PCE price index rose 0.2% m/m in July, exceeding economists’ expectations of a 0.1% increase. Core PCE, which excludes food and energy, also increased 0.2% m/m and 3.3% y/y, in line with market expectations. The July inflation report, coupled with flat real consumer spending, suggests the Federal Reserve retains some flexibility to keep interest rates unchanged in the near term.”

“US Treasury yields rose after the Fed’s preferred inflation gauge delivered mixed signals for July. Headline PCE inflation came in slightly above expectations at 3.7% y/y (consensus: 3.6%), while core PCE matched forecasts at 3.3% y/y. The US dollar strengthened against most G10 currencies as the inflation data kept alive expectations that the Federal Reserve may still resume rate hikes.”

“The US dollar extended gains against most G10 currencies overnight after a closely watched inflation gauge came in broadly in line with expectations. The DXY rose as much as 0.3% to close at 99.165, marking its biggest daily gain in nearly four weeks. The index has now recovered roughly half of the losses triggered by Treasury Secretary Scott Bessent’s surprise measures last week to support the bond market, as inflation data reinforced expectations that the Federal Reserve could begin raising interest rates before year-end.”

“Interest rate swaps imply a 43% probability of a Fed rate hike at next month’s meeting, while a 25bp increase is fully priced in by December.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)