The US Dollar Index (DXY) traded near 101.35–101.40 during the European session on Friday, declining after the release of US Personal Consumption Expenditures (PCE) inflation data, which eased expectations for further Federal Reserve (Fed) rate hikes [1][2][3]. The core PCE Price Index, the Fed’s preferred inflation gauge, rose 3.4% year-over-year in May, up from 3.3% in April, marking the highest annual reading since October 2023 [2][3]. Headline PCE inflation increased to 4.1% year-over-year in May from 3.8% in April, with both figures aligning with market expectations [2][3]. On a monthly basis, headline and core PCE rose 0.4% and 0.3%, respectively [3].
Despite the firmer inflation data, market participants lowered their expectations for additional Fed rate hikes. The CME FedWatch tool indicated that the odds of at least two rate hikes this year dropped to 41.7%, down from 50.2% a week ago [1]. For the July meeting, traders now price in a 28.9% chance of a 25 basis point hike, down from 34.2% in the previous session, while September hike expectations fell to 60.1% from 65.7% [2]. Fed funds futures continue to price in one rate hike around October, reflecting a cautious outlook for Fed easing [3].
US macroeconomic data remains robust, with Q1 GDP revised higher to 2.1% from 1.6%, personal income and spending both rising 0.7% month-on-month in May, and initial jobless claims easing to 215,000 [3]. New York Fed President John Williams stated that interest rates are well positioned to bring inflation back toward the central bank’s target, while Chicago Fed President Austan Goolsbee noted a 'glimmer of hope' on services inflation but cautioned that underlying inflation pressures remain elevated [2].
In currency markets, the USD/CHF pair traded 0.2% lower at around 0.8085, extending its correction from a 10-month high of 0.8140 reached on Wednesday [1]. The Swiss Franc outperformed major peers amid a risk-off mood triggered by an AI stocks-led sell-off, with S&P 500 futures down 0.43% to near 7,330 [1]. Technical analysis shows USD/CHF remains above its 20-period EMA at 0.8007, with an RSI of 65.37 approaching overbought territory, suggesting strong but potentially consolidating upward momentum [1].
Despite a modestly softer DXY and slightly lower US yields (2-year at 4.12%, 10-year at 4.39%), analysts at MUFG emphasize that the structural support for the dollar remains intact due to resilient US growth and sticky inflation, which continue to underpin the currency through favorable rate differentials [3].
CONCLUSION
US inflation data met expectations but reinforced the view that the Fed will remain cautious, leading to a decline in the US Dollar Index and lower odds of imminent rate hikes. However, strong US economic fundamentals and persistent inflation continue to provide underlying support for the dollar. Market sentiment remains cautious, with risk-off dynamics favoring the Swiss Franc and keeping the USD/CHF pair under pressure.