US Dollar Index Rebounds Toward 99.00 Ahead of US PCE Inflation Data

The US Dollar Index (DXY) traded near 99.00 during early European trading on Wednesday, with markets cautious ahead of key US inflation data. The index, which measures the greenback against a basket of six major currencies, edged higher as investors closely watched the upcoming US Personal Consumption Expenditures (PCE) price index for clues on the Federal Reserve's next policy moves.

**Inflation Data as Key Catalyst for Near-Term Direction**

The upcoming PCE data is widely viewed as the Fed's preferred inflation gauge, and its performance will directly impact market expectations for the interest rate path. Recent US inflation pressures have not fully subsided, while the labor market remains resilient, fueling bets that the Fed will maintain its hawkish stance. If inflation data comes in higher than expected, it could strengthen the case for continued policy tightening, providing further support for the dollar. Conversely, a notable cooling in the data could trigger short-term downside pressure on the greenback.

**Rate Hike Expectations Underpin Dollar's Firm Tone**

Although recent declines in international oil prices have eased some inflation concerns, the pass-through effect of earlier energy cost increases on consumer prices has not fully faded. Reports indicate a significant shift in market expectations for Fed policy this year, moving from earlier bets on rate cuts to expectations of maintaining higher rates for longer. Fed officials have also repeatedly emphasized the importance of price stability, reinforcing the market's hawkish policy assessment. This policy advantage, contrasted with expectations of sluggish growth and potential dovish shifts in major economies like the eurozone, underpins the dollar's firm tone.

**Technical Outlook: Firm but Momentum Slowing**

On the short-term chart, the dollar index has entered a consolidation phase after its recent advance, with prices still trading above key moving averages, suggesting a firm near-term trend. However, some technical indicators show signs of overbought conditions, hinting at slowing upside momentum, though the scope for a pullback appears relatively limited. Markets are now awaiting the inflation data for fresh directional cues to break the current consolidation pattern.