The US Dollar Index (DXY) continued to trade in a tight range near elevated levels around 101.50 during Friday's Asian session. The latest US inflation data has reinforced market expectations that the Federal Reserve will maintain its restrictive policy stance, providing underlying support for the greenback. Market focus is gradually shifting towards upcoming releases of the University of Michigan Consumer Sentiment Index and consumer inflation expectations.
Data released by the US Bureau of Economic Analysis showed the Personal Consumption Expenditures (PCE) price index rose 4.1% year-on-year in May, accelerating from 3.3% in April and marking the first time it has breached the 4% level in nearly three years. Rising energy prices were a key driver of the overall inflation rebound, with persistently high international oil prices due to ongoing Middle East tensions further fueling expectations that the pace of US inflation decline will slow. Concurrently, the core PCE price index, which the Fed closely monitors, increased 3.4% year-on-year, edging up from the previous 3.3% to reach its highest level since October 2023. The sustained resilience in core inflation reflects lingering price pressures in US services, leading to a broad market consensus that the Fed will find it difficult to pivot to an easing policy in the near term. Interest rate markets reacted swiftly. According to the CME FedWatch Tool, markets are currently pricing in approximately a 63.4% probability of a Fed rate hike at the September policy meeting. As markets recalibrate monetary policy expectations, US Treasury yields have remained at relatively high levels, providing fresh upward momentum for the Dollar Index.
Market participants remain highly attentive to the Federal Reserve's policy trajectory. Scott Anderson, Chief US Economist at BMO, stated that persistently high US PCE inflation implies the Fed still needs to maintain a wait-and-see stance, and further rate hikes in the future cannot be ruled out. He pointed out that services inflation exhibits significant stickiness; even if energy prices decline in the future, it would be difficult to quickly drive a substantial drop in overall core inflation. Therefore, divisions between hawks and doves within the Fed regarding monetary policy are likely to persist for some time.
Currently, the dollar's trajectory continues to be driven by a combination of US economic fundamentals and monetary policy expectations. If subsequent consumer confidence and inflation expectation data remain robust, the Dollar Index could extend its rebound. Conversely, if economic data shows signs of softening, it could weaken market bets on further tightening and potentially slow the dollar's advance. From a daily chart perspective, the Dollar Index has stabilized and rebounded after a period of consolidation and is currently trading near major moving averages, maintaining an overall range-bound but slightly bullish posture. The 101.20 area has emerged as a key short-term support level. A sustained hold above this zone could see the index attempt to challenge resistance at 102.00 and 102.50. A break below 101.20 could lead to a test of support near 100.80. Daily momentum has shown some recovery, with the medium-to-long-term trend still leaning bullish. On the 4-hour chart, the Dollar Index has climbed back above its short-term moving averages. The MACD is positioned near the zero line and is gradually forming a bullish crossover, with the red momentum bars beginning to expand, indicating a strengthening of short-term buying pressure. A decisive break above 102.00 could open the door for further gains towards 102.50. If the index faces resistance and pulls back, attention will turn to whether the support levels at 101.20 and 100.80 hold effectively. Overall, the short-term outlook remains one of range-bound trading with a slight bullish bias.
Elevated US inflation data continues to underpin robust market expectations for further Fed policy tightening this year, serving as a key factor supporting the Dollar Index. While some divergence in views on the future policy path persists, the stickiness of core inflation suggests the dollar retains a fundamental advantage in the near term. Going forward, consumer sentiment indices, commentary from Fed officials, and subsequent employment and inflation data will continue to influence market assessments of interest rate policy and determine whether the Dollar Index can extend its rebound.
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