The United States Dollar Index remains supported as expectations for a Federal Reserve rate hike continue to build. Markets are now pricing in a 63.4% chance of a rate increase in September, according to the CME Group FedWatch tool. Meanwhile, US PCE inflation accelerated to 4.1% in May amid oil supply concerns linked to tensions in the Middle East, reinforcing expectations that the Fed could keep tightening policy.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against a basket of six major currencies, recovers some of its previous session losses and trades near 101.50 during Friday’s Asian session. Investors now await the release of the Michigan Consumer Sentiment Index later in the day for fresh market direction.
The Greenback remains supported by increasing expectations that the Federal Reserve (Fed) could raise interest rates again. According to the CME FedWatch tool, markets are currently pricing in a 63.4% chance of a rate hike at the Fed’s September 15–16 meeting.
The hawkish outlook follows stronger inflation data, with the headline Personal Consumption Expenditures (PCE) Price Index rising to 4.1% year-over-year in May from 3.3% previously. The jump marks the first time in three years that headline PCE inflation has moved above the 4.0% threshold, largely driven by higher energy prices linked to tensions in the Middle East, keeping the possibility of additional Fed tightening alive.
Meanwhile, the core PCE Price Index, the Fed’s preferred measure of underlying inflation, climbed to 3.4% annually from 3.3% in April, marking the strongest core inflation reading since October 2023.
BMO Chief US Economist Scott Anderson stated that elevated PCE inflation is likely to keep the Fed cautious, with further rate hikes remaining a possibility. He added that persistent service-sector inflation may not ease quickly even if energy prices decline, suggesting continued policy debates between Fed hawks and doves.
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