Dollar pairs are on alert ahead of Thursday’s barrage of key US macro data, which could move markets. The most important release will be the PCE price index, which remains the Fed’s preferred inflation measure. After the Fed Chair emphasised the need to control inflation, traders have renewed their focus on the data as the odds of a rate hike increase.
Markets now price in a 70% chance that the FOMC will hike rates in September and an almost 90% chance that rates will rise before the end of the year. These expectations have pushed Treasury yields higher over the last week, supporting the dollar and weighing on the euro. The shift comes after the Fed’s latest policy meeting, where officials adopted a more hawkish tone and projected inflation to remain high later in the year.
Prices Are Not Coming Down
Last year, the Fed kept rates elevated because policymakers feared tariffs would raise prices. As the impact of tariffs started to fade, the Trump Administration’s conflict with Iran pushed energy prices higher. The timing helped offset part of the increase in energy costs because tariff-related pressures eased. At the same time, signs of weakness in the jobs market encouraged a more dovish outlook.
Higher energy prices usually take a couple of months to filter through to the broader economy. Hedging also reduces some of the immediate impact. Most major industrial companies, transportation firms, and energy producers do not buy on the open market. Instead, they secure long-term contracts that guarantee supply at fixed rates. Higher crude prices affect consumers more quickly because petrol stations often raise prices soon after costs increase.
Dollar Gains Amid Uncertainty
Higher energy prices take several months to appear in broader economic data. As a result, inflation could continue rising even if the Strait of Hormuz reopens. Transit through the Strait has increased since the deal was signed almost a week ago, but volumes remain below pre-war levels. Current flows have not been enough to rebuild depleted inventories. Even if shipments increase, they will take several weeks to reach their destinations.
WTI remains $10 above its pre-war price level, suggesting the market still doubts that energy supplies will normalise soon. This could keep inflation pressures elevated in the US and force the Fed to act. Traders will look for signs that higher energy prices are creating secondary effects across the economy. Such evidence would increase the odds of an earlier rate hike and likely support the dollar.
What the Market is Looking For
The consensus forecast is for the US May core PCE price index to remain unchanged at 3.3%, well above the Fed’s 2.0% target. Economists also expect the final reading of US Q1 GDP to accelerate to 1.6% annualised growth from 0.5% in the fourth quarter of last year. Persistent inflation and stronger economic growth would give the Fed room and motivation to hike rates despite potential pressure from the White House.
If PCE comes in below expectations, traders could see it as a sign that inflation fears are overstated. Last year’s tariff-related inflation proved lower than expected, and the same outcome could occur with the current energy supply issue. In that case, markets could push back expectations for a rate hike, weakening the dollar while supporting gold.
