DXY Surges on PCE Inflation Data

The US Dollar Index (DXY) has seen its largest daily gain in nearly four weeks following the release of July's PCE inflation data, which came in slightly higher than expected.

According to UOB Global Economics & Markets Research, the headline PCE price index rose 0.2% month-over-month (m/m) in July, beating economists' forecasts of a 0.1% increase. The core PCE, which excludes food and energy, also increased by 0.2% m/m and 3.3% year-over-year (y/y), aligning with market expectations.

The 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 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.