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The U.S. dollar strengthened on Wednesday after hotter-than-expected inflation data modestly increased expectations for a Federal Reserve interest rate hike ahead of this week’s Jackson Hole symposium.
The Personal Consumption Expenditures (PCE) Price Index rose 3.7% year over year in July, unchanged from June but slightly above economists’ 3.6% forecast. On a monthly basis, PCE inflation increased 0.2%, exceeding expectations for a 0.1% gain after declining 0.1% in June.
The data provided some support for the dollar without delivering a decisive signal on the Fed’s next move. Markets raised the probability of at least a 25-basis-point rate hike at the September meeting to 40.1%, according to CME FedWatch, up from roughly 36% before the report.
The U.S. Dollar Index gained 0.21% to 99.12, putting it on course for its strongest daily advance since August 6. The euro slipped 0.16% to $1.1655.
Other U.S. economic data showed second-quarter GDP growth was confirmed at 1.5%, matching the initial estimate. Personal income climbed 0.4% in July, beating expectations for a 0.2% increase, while consumer spending was unchanged following a 0.3% rise in June.
Attention now turns to Federal Reserve Chair Kevin Warsh’s debut speech at the Jackson Hole conference on Friday. Investors will watch closely for clues on monetary policy, although expectations for explicit guidance remain limited. Boston Fed President Susan Collins said Tuesday that rates may need to rise soon unless incoming data show inflation continuing to ease.
In Europe, ECB board member Isabel Schnabel said interest rates need to increase further as the Middle East conflict and resilient eurozone economy create additional inflation risks.
Elsewhere in currency markets, the Canadian dollar weakened 0.24% to C$1.387 per U.S. dollar amid renewed U.S.-Canada trade tensions. The Japanese yen fell 0.11% to 159.34 per dollar, while sterling declined 0.35% to $1.3601, heading toward its largest daily drop since August 3.
