US Dollar declines as PCE falls, markets confident of larger November cut

• US inflation signals are cooling with PCE reading below expectations.
• Consumer sentiment has rebounded, indicating brighter economic expectations.
• USD might see additional downside if the markets remain stubborn on November's 50 bps cut bet.

The US Dollar Index (DXY), which measures the value of the USD against a basket of major currencies, stands soft after the release of the US Personal Consumption Expenditures (PCE) data from August. The headline PCE inflation, the Federal Reserve's (Fed) preferred inflation measure, came in softer than expected, while the core PCE inflation matched expectations.

Investors will be attentive to incoming data to continue placing their bets on the next Fed decision. Now focus shifts to September's labor market data.

Daily digest market movers: US Dollar declines on soft PCE data

• Market is starting to pare back its Fed easing bets, with the market now pricing in 175 bps of total easing over the next 12 months vs. 200 bps at the start of this week.
• Headline PCE Price Index rose by 2.2% YoY in August, below market expectations of 2.3%.
• Core PCE Price Index, excluding food and energy, increased by 2.7%, matching consensus estimates.
• Consumer confidence in the US improved in September with the University of Michigan's Consumer Sentiment Index edging higher to 70.1 from 66 in August.
• The five-year inflation expectation held steady at 3.1%, indicating that consumers do not expect inflation to rise significantly in the coming years.
• While dovish bets eased somewhat, the markets are pricing in a 50 bps cut for the next November meeting, which seems to weaken the USD.

DXY technical outlook: DXY signals bearish momentum, resistance at 101.00

Technical analysis indicates that the DXY index remains vulnerable to further declines as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) continue their downward trend and struggle to gather momentum. The 101.00 level continues to act as a strong resistance, capping the upside potential for the US Dollar.

Supports are located at 100.50, 100.30 and 100.00, while resistances are at 101.00, 101.30 and 101.60. The index's inability to overcome the 101.00 level suggests that the downside momentum could persist in the near term.