Dollar on Thin Ice as PCE Report Looms

The US Dollar Index (DXY) is facing key support as it enters Wednesday's session under pressure. The inflation report due today could determine whether the dollar has further to run.

The backdrop has changed noticeably over the past week, with longer-dated US Treasury yields retreating following Treasury Secretary Scott Bessent's decision to expand buybacks of long-dated government bonds. Falling oil prices have also provided relief for the bond market.

The PCE report is a crucial test for markets. Economists expect July inflation to remain around 3.3% year-on-year, still above the Fed's 2% objective. A reading around 0.2% month-on-month or softer would suggest that inflation pressure is easing.

A benign core PCE reading could strengthen the view that the dollar has further to fall, particularly if US yields respond by moving lower again.