Hot PCE Print Lifts Dollar as Fed Rate Bets Firm Up

Market Wrap-up: Dollar Index Climbs to 99.20 as Inflation Data Reinforces September Rate Hike Bets

The market's focus yesterday was on the US PCE inflation report, with the Fed's preferred inflation gauge rising more than expected in July.

Specifically, the personal consumption expenditures (PCE) price index rose 0.2% month over month and 3.7% year over year, the Commerce Department reported on August 26. Both readings came in 0.1 percentage point above forecasts.

Core PCE, which excludes volatile food and energy prices, rose 0.2% month over month and 3.3% year over year, in line with expectations. The report also showed personal income rising 0.4% and spending rising 0.2%, both above forecasts.

The data was released as Fed officials weigh their next policy move, with inflation showing only modest monthly gains through the summer but remaining well above the central bank's 2% target.

Following the PCE report, the DXY, which measures the strength of the US dollar, rallied to 99.20, weighing on other major currencies including the euro, sterling and yen.

The Australian dollar, however, was a notable exception among major currencies, holding its gains after the hotter than expected inflation data. The underlying strength of the AUD has been driven mainly by growing expectations of an upcoming rate hike from the Reserve Bank of Australia (RBA).

National Australia Bank (NAB) now expects rates to rise to 4.6% from the current 4.35% at the September meeting, while Commonwealth Bank and ANZ expect the move in November but acknowledge clear risk of an earlier hike.

The dollar's rally also weighed on gold, with spot prices falling 1.4% to $4,592.97 per ounce as markets increased bets on a Fed rate hike next month.

Meanwhile in energy markets, oil prices traded nearly flat in the last session after Iran said it had reached an agreement with Oman over the Strait of Hormuz.

Under the agreement, vessels will enter the Persian Gulf through Iranian waters, then exit the region through a shared corridor passing through the territorial waters of both Oman and Iran. Brent crude, the international benchmark, ended the session down 74 cents at $87.84 a barrel, while US WTI fell 13 cents to $82.23 a barrel.

Looking ahead for today, markets await data on Initial Jobless Claims, Goods Trade Balance, Wholesale Inventories and Retail Inventories.

Markets will also continue looking ahead to Fed Chair Kevin Warsh's speech on Friday at the Fed's annual Jackson Hole symposium in Wyoming, though some analysts expect him to maintain a cautious tone and offer little signal ahead of the September policy meeting.

DXY:

Key takeaway:

• The dollar index surged to 99.20 after July's PCE inflation data came in hotter than expected, with headline PCE up 0.2% m/m and 3.7% y/y, both 0.1 point above forecasts.
• Core PCE matched estimates at 0.2% m/m and 3.3% y/y, but stronger income and spending readings, up 0.4% and 0.2% respectively, reinforced the case for a firmer dollar.
• Gains pressured most major peers, including the euro, sterling and yen, as markets raised bets on a Fed rate hike next month.

Technical Outlook:

• Daily Bias: Bullish
• Support: 98.86  
• Resistance: 99.29  

Gold:

Key takeaway:

• Spot gold fell 1.4% to $4,592.97/oz, weighed down by the broad dollar rally following the PCE report.
• Rising expectations of a September Fed rate hike added further headwinds for the metal.

Technical Outlook:

• Daily Bias: Bearish
• Support: 4,583  
• Resistance: 4,673

WTI:

Key takeaway:

• Brent and WTI traded largely flat, with Brent down 74 cents to $87.84/barrel and WTI off 13 cents to $82.23/barrel.
• Oil prices were little changed as markets assessed Iran’s announcement of an agreement with Oman on Strait of Hormuz transit, allowing vessels to enter the Persian Gulf through Iranian waters and exit via a shared corridor through both nations' territorial waters.

Technical Outlook:

• Daily Bias: Bullish with Correction Risk
• Support: 79.62
• Resistance: 83.33

AUD/USD:

Key takeaway:

• The Australian dollar was a notable outlier, holding gains even as the broader dollar rallied on the hot PCE print.
• Strength was underpinned by growing expectations of an RBA rate hike, with NAB now forecasting a move to 4.6% from 4.35% as soon as the September meeting.
• Commonwealth Bank and ANZ still expect the hike in November but acknowledge clear risk of an earlier move.

Technical Outlook:

• Daily Bias: Bullish
• Support: 0.71567
• Resistance: 0.71896

Calendar Watch:

• Today: Initial Jobless Claims, Goods Trade Balance, Wholesale Inventories, and Retail Inventories.
• Friday: Fed Chair Kevin Warsh speaks at the Jackson Hole symposium, though some analysts expect him to stay cautious and avoid signaling ahead of the September policy meeting.

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