The US Dollar Index is currently trading near 99.30, having oscillated within a 98.91-99.55 range for the week, positioning it at a critical juncture for directional movement. The 99.55 level represents a key resistance area, a technical threshold that will determine whether the index can extend its upward trajectory. The potential for a breakout hinges on the release of the US April PCE inflation data scheduled for tonight.
The US April PCE data is set for release at 20:30 Beijing time on Thursday. Market consensus anticipates the core PCE index to rise 0.3% month-over-month and 3.3% year-over-year, while the headline PCE is forecast to climb to 3.8% year-over-year, marking its highest level since May 2023.
Against a backdrop of recent hawkish rhetoric from Federal Reserve officials, this inflation report will serve as a crucial gauge for assessing the likelihood of an interest rate hike before year-end. Current market pricing suggests approximately a 50% probability of at least one rate hike by the end of 2026.
Data Timing and Significance The Bureau of Economic Analysis will release the April Personal Consumption Expenditures (PCE) Price Index data at 20:30 Beijing time on Thursday. This timing coincides with a critical period of escalating US-Iran military tensions and volatile oil prices, heightening market sensitivity to this data release beyond typical levels.
Furthermore, this report is the final key inflation reading before the Fed's June policy meeting on June 11, providing vital input for policymakers. A PCE reading exceeding expectations could directly influence the Fed's policy language at the upcoming meeting and potentially increase the urgency for a rate hike this year.
Market participants closely monitor the PCE Price Index as it is the Fed's preferred inflation gauge, with significant implications for policy outlook. Compared to the more widely known CPI, the PCE better reflects actual consumer spending behavior by accounting for substitution effects—for instance, capturing shifts from beef to chicken when beef prices rise.
Consequently, when the Fed adopted its "average inflation targeting" framework in 2020, it explicitly designated the PCE as its official inflation measure. The prevailing market expectation is for April's core PCE to rise to 3.3% year-over-year and headline PCE to 3.8%. A reading above these forecasts would indicate more persistent inflation than previously assessed, potentially shifting the Fed's "hawkish hold" stance further toward a "rate hike bias."
Conversely, data below expectations might offer a brief respite for markets. However, given uncertainties surrounding the Middle East situation, a single data point is unlikely to completely alter the current policy outlook.
Core PCE Expectations: 0.3% MoM, 3.3% YoY The core PCE Price Index, which excludes volatile food and energy prices, is expected to rise 0.3% month-over-month in April, matching March's increase. This monthly growth rate suggests underlying inflation pressures have not eased as significantly as markets had hoped.
Historically, a 0.3% monthly increase, while below the 0.5% or higher levels frequently seen during the 2022-2023 peak, remains well above the long-term monthly average of approximately 0.17% needed for the Fed to achieve its 2% inflation target. If this monthly pace persists in the 0.2%-0.3% range, the Fed will find it difficult to gain sufficient confidence to consider rate cuts and may even be compelled to raise rates further. TD Securities offers a slightly more optimistic forecast of a 0.26% monthly rise, but even that level remains above what is consistent with the 2% inflation target.
For the 12 months ending in April, core PCE inflation is projected to edge up to 3.3%. Meanwhile, headline PCE inflation is expected to reach 3.8% year-over-year, its highest level since May 2023. This suggests the "last mile" of this inflationary cycle may be longer than anticipated by both the Fed and markets. A 3.3% core PCE reading would be the highest since the start of 2024, indicating progress on disinflation has stalled or even reversed. The jump in headline PCE to 3.8% is primarily driven by energy prices—Brent crude oil briefly surpassed $115 per barrel in April and, despite a recent pullback, remains above $95.
This presents a dual challenge for the Fed: high headline PCE readings influence public inflation expectations, while stubborn core PCE limits policy flexibility. As Fed Governor Waller stated, he would not hesitate to support a rate hike if inflation expectations become "unstable." Tonight's data will serve as a key test of whether this warning translates into action.
Market Focus: Rising Rate Hike Expectations Markets will scrutinize the PCE data closely, as Fed officials consider this inflation gauge when determining their next policy moves. As the Fed's official inflation benchmark, a report showing persistent inflation would significantly increase the likelihood of removing "accommodative bias" language at the June meeting. Kashkari has already dissented, and Waller has publicly supported a hawkish shift.
Given ongoing uncertainty from the Middle East conflict, investors will assess the PCE report's details to judge whether the Fed might opt for a rate hike before year-end. Current market pricing implies about a 50% probability of a hike by year-end. If core PCE exceeds expectations and breaks above 3.3%, this probability could rise above 60%. The trajectory of super-core services will be critical—a monthly increase exceeding 0.3% would suggest "second-round effects" are taking hold.
Market Pricing: ~50% Probability of a Hike by Year-End According to the CME FedWatch Tool, markets currently price in roughly a 50% probability of at least one 25-basis-point rate hike by the end of 2026. This represents a significant increase from the 30% probability seen a month ago.
This marks a fundamental reversal from the "multiple rate cuts this year" expectation prevalent at the start of the year. With elevated oil prices and PCE expected at 3.8%, inflation concerns have now overshadowed recession fears. Should tonight's PCE data exceed expectations, the probability of a hike could surpass 60%, providing further support for the US dollar.
Kashkari: Inflation Risks Are Higher Minneapolis Fed President Neel Kashkari noted in an interview on Wednesday that data released since the last policy meeting indicates higher inflation risks.
Kashkari dissented at the April policy meeting, voting against including language suggesting an accommodative bias in the policy statement. His latest remarks further confirm the strengthening of hawkish voices within the Fed.
Waller's Shift: From Dove to Hawk Meanwhile, Fed Governor Christopher Waller, previously known for his dovish outlook, also shifted his stance last week, stating that the statement's accommodative bias should be removed.
Waller added that he would not hesitate to support raising the policy rate if inflation expectations become unstable. This statement is significant, coming from a governor previously considered among the most dovish.
TD Securities Preview: Both Core and Headline PCE Expected Higher In a preview of the PCE inflation report, TD Securities stated: "We expect both core and headline PCE price indices to slow to 0.26% and 0.43% month-over-month, respectively, in April."
"Tariff passthrough was relatively mild in the month, with a slowdown in super-core services offsetting strength in housing. Our forecast implies core and headline PCE at 3.3% and 3.8% year-over-year, respectively. We also anticipate a slowdown in both nominal and real personal spending for the month."
The US April PCE data will serve as a key benchmark for testing the Fed's policy path. Market expectations point to core PCE rising to 3.3% and headline PCE to 3.8% year-over-year, both multi-month highs. This aligns with recent hawkish signals from Fed officials like Kashkari and Waller, as well as market pricing of a 50% probability for a rate hike by year-end. Should PCE data come in stronger than expected, it could further reinforce Fed rate hike expectations, driving the US dollar higher, pushing up Treasury yields, and putting pressure on global risk assets. Investors should closely monitor market reactions following the data release and any subsequent comments from Fed officials.
US Dollar Index Daily Technical Analysis The US Dollar Index currently exhibits a generally firm consolidation pattern on the daily chart, with modest short-term upward momentum and a relative balance between bullish and bearish forces.
Regarding moving averages, the current price around 99.31 sits above the 50-day, 100-day, and 200-day averages, with the medium-term averages in a bullish alignment providing support. The 20-day (97.48), 50-day (98.12), and 100-day (98.62) moving averages form a support zone below. The key resistance above lies at the recent high of 99.55, presenting a near-term cap on upward movement.
The RSI at 41.46 is near the 50 neutral level, not yet in overbought or oversold territory, indicating neutral market momentum and clear consolidation characteristics.
For the MACD indicator, the DIFF line (-0.3752) and DEA line (-0.3632) are nearly converged, with the MACD histogram at -0.024, close to the zero line. This suggests neither bullish nor bearish momentum is strong, with no clear trend signal yet formed.
The medium-term trend for the US Dollar Index is biased to the upside, but it faces resistance near the recent high, undergoing a consolidation phase. Key support below lies near the 100-day moving average at 98.62. Holding above this support could allow for another attempt at the high. The immediate resistance is the 99.55 level; a decisive break above would open the door for further gains. As of 15:20 Beijing time on May 28, the US Dollar Index was trading at 99.29.
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