The US Dollar Index (DXY) has maintained its strength, trading around 101.60 during European hours on Thursday, after reaching a 13-month high of 101.80 on Wednesday [1][2][4]. This marks the fourth consecutive day of gains for the dollar, driven by rising market expectations of Federal Reserve (Fed) interest rate hikes later this year. The CME FedWatch tool indicates that markets are pricing in nearly an 83% probability of rate hikes by the end of December [1]. Fed Chairman Kevin Warsh has signaled a firm focus on taming inflation, reinforcing the hawkish sentiment [1].
Investors are closely watching the upcoming US Personal Consumption Expenditures (PCE) Price Index data, with consensus expecting headline inflation to rise to 4.1% year-over-year in May from 3.8% in April, and core PCE to edge up to 3.4% from 3.3% [1][4]. ING analysts, however, see risks that the core PCE print could come in softer at 0.2% month-over-month versus the expected 0.3%, which could limit further hawkish repricing and potentially mark a peak in the dollar rally [3]. ING maintains a bearish dollar outlook for the second half of the year, expecting no Fed hikes in 2026 [3].
The US 10-year Treasury yield remains steady near 4.1%, its lowest in over six weeks, after a 10 basis point drop the previous day, attributed to progress in US-Iran peace talks that eased inflation fears by pulling oil prices lower [1]. Meanwhile, US stock index futures are trading positively, with Nasdaq Futures up more than 2% [2]. The dollar has been the strongest against the New Zealand Dollar this week, gaining 1.73%, and has also posted gains against other major currencies [2].
On the euro side, the currency remains pinned near 13-month lows against the dollar, with EUR/USD capped below 1.1370 after hitting 1.1324 on Wednesday. This comes as German GfK Consumer Confidence data, while slightly improved to -29.2, missed expectations and remains deeply negative, further weighing on the euro [4].
In related markets, gold prices have fallen below $4,000/ounce, pressured by rising global front-end yields and a repricing of Fed, Bank of England, and European Central Bank expectations. BNY’s Geoff Yu notes that renewed gold outperformance would likely require a loss of fiscal and monetary credibility, which is not currently evident [5].
Forward-looking, the market is awaiting not only the PCE data but also personal income, spending, and GDP figures, as well as comments from Fed officials Bowman and Williams, who may push back against aggressive rate hike expectations [2][3].
CONCLUSION
The US Dollar remains robust near multi-month highs, supported by expectations of further Fed tightening and anticipation of key inflation data. While some analysts see risks of a peak in the dollar rally if PCE data is softer than expected, market sentiment remains bullish in the short term. Broader market impacts include pressure on gold and continued weakness in the euro, with investors closely monitoring upcoming US economic releases and central bank commentary.