Sticky PCE at 3.7% Revives Fed Hike Bets, Lifting DXY

Sticky July PCE inflation at 3.7 percent year over year has revived Federal Reserve hike expectations, lifting the dollar index to 99.14 while EUR/USD and GBP/USD retreated from multi-week highs.

"The July reading won't be enough to push the Fed to hike in September," said Ariane Curtis, senior economist at Capital Economics. "But with the annual rate still at 3.3% and given our relatively upbeat forecast for growth and the labor market, it remains a matter of when — not if — rates are raised."

The PCE price index climbed 0.2 percent month over month and 3.7 percent year over year, versus the 3.6 percent annual pace expected. Core PCE, which excludes food and energy, rose 0.2 percent monthly and held at 3.3 percent annually — in line with forecasts and unchanged from June. The monthly increase suggests inflation is rising at a mild rate; New York Fed president John Williams has said monthly PCE at 0.2 percent or lower would indicate inflation is returning to the Fed's 2 percent target on its own.

The dollar index rebounded from 98.56 to trade at 99.14, though it remains below the 100-period EMA at 99.45 and contained within a descending trendline. EUR/USD corrected to 1.1656 from 1.1711, while GBP/USD retreated to 1.3588 from the 1.3656–1.3676 resistance zone. All eyes now turn to Fed Chairman Kevin Warsh's Jackson Hole speech Friday, where analysts expect him to avoid policy hints while the central bank remains divided between holding and hiking at the September FOMC meeting.

Rate Path Uncertainty Caps Dollar Recovery

Boston Fed president Susan Collins said Tuesday she was content to hold rates steady at the last meeting but would need evidence that inflation is dropping to continue holding. Absent that, Collins said it would be appropriate to raise rates "soon" to ensure the Fed gets inflation back down in a reasonable time frame.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said July's PCE data would not shift the balance for September's FOMC meeting. "But if subsequent data point in the same direction, the Fed may feel more pressure to move off the sidelines," she said.

The DXY structure remains bearish despite the rebound: the index is still below the 100-EMA at 99.45 and confined within a descending trendline near 99.15. Resistance sits at 99.12–99.26, followed by 99.48, 99.69, and 99.99. Support is at 98.99, then 98.82, 98.56, and 98.33. A break above 99.26 and 99.48 would allow a retest of 99.69; a move below the descending trendline would likely trigger a retest of 98.82 and 98.56.

EUR/USD and GBP/USD Test Key Technical Levels

EUR/USD is trading at 1.1656 after correcting from 1.1711, holding above the 50-EMA at 1.1641 and the 100-EMA at 1.1600. The pair remains within an ascending channel, with the RSI at 49 in neutral territory after an earlier overbought reading. Support sits at 1.1641, then 1.1624 and 1.1600; resistance is at 1.1658, 1.1678, 1.1711, 1.1733, and 1.1751. As long as EUR/USD holds above 1.1641, the bullish structure remains intact, with potential gains toward 1.1678 and 1.1711.

GBP/USD has retreated sharply from the 1.3656–1.3676 resistance zone to trade at 1.3588, testing the lower boundary of its rising channel at 1.3597. The pair sits below the 50-EMA with the RSI at 39, indicating negative short-term momentum. Support is at 1.3565, followed by 1.3526 and 1.3481; resistance is at 1.3598, then 1.3656–1.3676 and 1.3707. A break below 1.3565 would be a clear negative sign, likely leading to a drop toward 1.3526.

The euro's relative outperformance stems from the ECB's own inflation challenges. Recent euro-area data showed business activity growth, and despite ongoing energy costs and supply disruptions, the path back to the ECB's 2 percent goal is beginning — leading to expectations for further tightening despite uneven growth. Sterling, meanwhile, has been driven more by expectations of U.S. policy than domestic factors, according to Reuters reporting Tuesday.

For the dollar, the immediate focus is Warsh's Jackson Hole address. If he indicates tolerance for persistent inflation, the DXY could break below 98.82 and retest 98.56. If he leans hawkish, the index could push through 99.26 and target 99.69. The September FOMC meeting remains the key decision point, with markets pricing a hold as the more likely scenario but a hike increasingly in play. Higher-for-longer rate expectations could also pressure equity valuations and gold prices while supporting dollar-denominated assets.

This article is for informational purposes only and does not constitute investment advice.