Dollar: Inflation Data Supports Rally - UOB

Boosted by slightly higher-than-expected U.S. July PCE inflation data, the U.S. dollar index (DXY) recorded its largest single-day gain in nearly four weeks over the past trading session. UOB Global Economics & Markets Research noted that the data supported higher U.S. Treasury yields and drove the dollar stronger against most G10 currencies. As of press time, the dollar index was trading near 99.16, having rebounded from earlier lows and recovering roughly half of its prior losses.

**PCE Overshoot Strengthens Hawkish Expectations**

As a key inflation gauge closely watched by the Federal Reserve, the July PCE data slightly exceeded expectations, reinforcing market bets on policy tightening. The report showed that markets continued to price in expectations that the Fed may resume rate hikes before year-end. This shift in expectations directly lifted U.S. Treasury yields, providing core momentum for dollar strength. Despite internal divisions within the Fed over the future policy path, the stickiness of the latest inflation data makes near-term rate cut expectations difficult to materialize, giving the dollar dual support from both fundamentals and sentiment in the short term.

**Dollar Rebound Momentum and Subsequent Resistance**

This rebound in the dollar index has broken the recent one-sided weakness pattern, but whether it can sustain its strength still faces a test. The current exchange rate has recovered to the 99.16 level, but to confirm a trend reversal, it needs to effectively break through the key resistance zone above. Analysts believe that despite the significant single-day gain, the market still needs more economic data to verify whether inflation can sustainably decline toward target levels. If subsequent data fails to maintain strong momentum, the dollar's rebound momentum may be limited, potentially returning to a range-bound consolidation pattern.

**Risk Sentiment and External Factors Intertwine**

Geopolitical tensions in the Middle East have somewhat eased, with market risk sentiment slightly improving, and Brent crude oil prices retreating to around $87 per barrel. This shift has, to some extent, reduced safe-haven demand for the dollar. However, negotiations with the U.S. remain deadlocked, and geopolitical risks have not been fully resolved. Against this backdrop, the dollar index's trajectory will continue to be driven by inflation expectations, Fed policy signals, and global risk sentiment in tandem.