US data lifts dollar as Fed hike expectations edge higher

The U.S. dollar saw gains on Wednesday, buoyed by a fresh batch of economic data that included inflation readings suggesting a potential for further interest rate increases by the Federal Reserve. The Commerce Department reported that the Personal Consumption Expenditures Price Index climbed 3.7% in the 12 months through July, holding steady from June and slightly surpassing the 3.6% forecast by Reuters-polled economists.

On a monthly basis, the PCE index increased by 0.2%, exceeding the 0.1% estimate and reversing the 0.1% decrease seen in June. "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," commented George Vessey, lead FX and macro strategist at Convera in London. He added, "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."

The dollar index, which tracks the greenback against a basket of major currencies, rose 0.21% to 99.12, on track for its largest daily increase since August 6. The euro dipped 0.16% at $1.1655.

Meanwhile, European Central Bank (ECB) board member Isabel Schnabel signaled that interest rates need to climb higher. In an interview with Bloomberg News, she cited the ongoing conflict in the Middle East and the robust euro zone economy as factors posing upside risks to inflation. This follows a Reuters report indicating that ECB policymakers are prepared to raise rates in September to mitigate the effects of the Iran war, though they show little inclination for further tightening beyond that meeting.

“

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.