The latest US Personal Consumption Expenditures (PCE) data for May showed headline inflation rising to 4.1% year-over-year from 3.8% in April, marking its highest annual reading since April 2023, while the core PCE Price Index increased to 3.4% from 3.3% YoY and held steady at 0.3% month-over-month [1][2]. Despite the sharp increase in headline PCE, traders focused on the modest rise in core PCE, leading to a pullback in the US Dollar and a modest gain for the Japanese Yen, with USD/JPY trading around 161.75 and the Yen remaining near its 40-year lows [1]. The US Dollar Index (DXY) traded at 101.40 after reaching a more than one-year high of 101.80 the previous day [1].
Market participants scaled back expectations for a September Federal Reserve rate hike, with the probability falling to 60% from 67% before the inflation report, according to the CME FedWatch Tool [1]. However, the downside for the US Dollar appears limited due to stronger first-quarter GDP growth and lower-than-expected Initial Jobless Claims, reinforcing expectations that the Fed can maintain a restrictive monetary policy stance [1].
The Japanese Yen's persistent weakness above the 160.00 threshold has kept intervention risks elevated, with Scotiabank strategists noting that USD/JPY remains uncomfortably close to 162 and that there is little support before 160 [1][3]. Hawkish remarks from Bank of Japan (BoJ) officials, including guidance on a 'neutral' rate near 2% compared to the current policy rate of 1.00%, have done little to support the Yen, as the wide interest-rate differential between the BoJ and the Fed continues to act as a headwind [1][3]. Attention is now turning to the upcoming Tokyo Consumer Price Index (CPI) report, where consensus expects a pickup in both headline and core inflation into the mid-to-upper 1% range, which could provide clearer signals on the BoJ's next policy move [1][3].
Meanwhile, the Australian Dollar (AUD/USD) held steady near the 0.6900 area, struggling to gain amid a pullback in the US Dollar and ongoing geopolitical risks around the Strait of Hormuz [2]. Australia's labor market showed signs of recovery in May, with Employment Change rising by 40.3K, above expectations of 25K, and the Unemployment Rate holding steady at 4.4% [2]. However, technical analysis suggests a bearish near-term bias for AUD/USD, with rallies likely to be sold into as the price remains below key moving averages [2].
CONCLUSION
US PCE inflation data met expectations, prompting a modest pullback in the US Dollar and a slight gain for the Japanese Yen, though the Yen remains near intervention levels. The probability of a September Fed rate hike has decreased, but strong US economic data continues to support a cautious Fed stance. The Australian Dollar remains under pressure due to technical factors and geopolitical risks, despite positive domestic labor data.