US Dollar Index edges lower following US PCE Inflation

As stable US core PCE inflation growth seems insufficient to affect firm Fed rate-cut expectations, the US dollar declines. It is largely expected that the Fed will hold interest rates steady the following week. The confidence of Fed policymakers on the return of inflation to a 2% path has increased.

Following the release of the June Personal Consumption Expenditure Price Index (PCE) report by the US Bureau of Economic Analysis (BEA), the DXY Index saw a minor decline to close to 104.20 during the New York session on Friday. The rate on the US 10-year Treasury drops to 4.20%. As of writing, DXY is trading at 104.318.

The report showed that annual core PCE, which excludes volatile food and energy items, grew steadily by 2.6%, while economists anticipated a deceleration to 2.5%. The month-on-month core PCE inflation rose at a higher pace of 0.2% from expectations and the former release of 0.1%. Though the core PCE data, which is a Fed’s preferred inflation gauge, turned out sticky, it is insufficient to dampen market expectations that the central bank will start reducing interest rates from the September meeting and will cut them twice this year.

Meanwhile, annual PCE inflation decelerated expectedly to 2.5% from the former release of 2.6%. Going forward, the next trigger for the US Dollar will be the Fed’s monetary policy meeting, which is scheduled for Wednesday. The Fed is widely anticipated to keep interest rates at their current levels. Investors will look cues for whether the Fed has confidence in current rate-cut speculation.

Fed policymakers have acknowledged that price pressures have returned to their path towards the central bank’s target of 2%. Their confidence in the resumption of the disinflation process scaled after a back-to-back decline in the CPI reports for last two months. However, officials hesitate to endorse rate cuts as the battle against stubborn inflation is far from over.