US data lifts dollar as Fed hike expectations edge higher

The U.S. dollar saw gains on Wednesday, buoyed by economic data that slightly increased expectations for a Federal Reserve interest rate hike. The Personal Consumption Expenditures Price Index rose 3.7% annually in July, matching June's figure and exceeding economists' estimates. Monthly PCE inflation also edged up.

"Overall, because the headline was warm enough to prevent a dovish victory, those details weren't really strong enough to hand the hawks a clear win," said George Vessey, lead FX and macro strategist at Convera. He cautioned against aggressive trading, noting competing narratives influencing the dollar's direction.

The dollar index climbed 0.21% to 99.12, its largest daily gain since August 6. The euro dipped 0.16% to $1.1655. Meanwhile, other U.S. data indicated second-quarter economic growth remained at 1.5%, personal income increased by 0.4% in July, and consumer spending was flat.

Market expectations for a Fed rate hike in September rose to 40.1% after the data. Federal Reserve Chairman Kevin Warsh is set to speak at the Jackson Hole conference, though significant policy outlooks are not anticipated. Separately, European Central Bank board member Isabel Schnabel indicated that interest rates must continue to rise, citing risks to inflation from the ongoing conflict in the Middle East and a strong euro zone economy.

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Overall, because the headline was warm enough to prevent a dovish victory, those details weren't really strong enough to hand the hawks a clear win, so I wouldn't chase the rally at all. But I wouldn't fade it aggressively either, we've got loads of competing narratives driving FX at the moment, particularly the dollar, haven't we, so it's hard to have a strong conviction in either direction right now.