United States FX Today: The US Dollar climbs as we approach crucial PCE inflation data

The US Dollar Index (DXY) is trading strongly on Thursday, awaiting data on the Personal Consumption Expenditures (PCE) Price Index, due on Friday at 12:30 GMT.

The index, which is the Federal Reserve's (Fed) preferred measure of inflation, could strongly influence the outlook for monetary policy and, consequently, the trajectory of the Greenback.

In the run-up to the release of the August PCE report, markets are looking to validate or invalidate the anticipated scenario of two further Fed rate cuts by the end of 2025, a dynamic that makes the US Dollar (USD) particularly sensitive to the slightest inflationary surprise.

PCE inflation: The litmus test for the Fed

Markets are expecting August PCE to rise by 2.7% YoY for the headline index, compared with 2.6% the previous month, and by 2.9% YoY for core PCE, stable compared with July.

Fed Chairman Jerome Powell gave a preview of these figures in a recent speech, saying that "inflation remains on a high but relatively stable trajectory".

Friday's data will be decisive. A figure above 2.9% for core PCE could rekindle fears of a prolonged period of high rates, or even a partial reversal of the downward policy initiated in September. Conversely, confirmation that pressure is easing could bolster the scenario for further rate cuts.

As Kyle Rodda of Capital.com points out, "these data will test the Fed's ability to continue its rate cuts without compromising its credibility on anchoring inflation expectations."

Services, goods and rents: The real dynamics behind inflation

Analysis of the composition of inflation reveals stubborn pressure, particularly in non-housing services. According to a recent study by the Dallas Fed, non-housing services contributed 1.9 percentage points to core inflation over 12 months, well above levels compatible with 2% inflation.

These increases can be explained in part by resilient demand for high-value-added services, but also by more volatile components such as portfolio management fees, which are strongly influenced by stock market fluctuations.

The goods sector, long in a state of disinflation, is now showing signs of a rebound. This is due to the gradual transmission of the new tariffs decided by US President Donald Trump's administration, which have already caused a 0.10 point rise in core inflation in August, according to Goldman Sachs economists.

Preston Caldwell, chief economist at Morningstar, warns that "the tariffs are reigniting inflationary pressures, with an impact that is likely to spread to the wider economy in the months ahead."

Technical analysis of DXY: Bullish breakout to be confirmed

US Dollar Index 4-hour chart. Source: FXStreet

The US Dollar Index posted a solid bullish acceleration on Thursday, breaking above a bearish channel whose upper bound was at 98.20. This could signal a short-term bullish reversal, with potential targets at 98.85 and 99.00.

However, a return to the channel, below the 98.20 level, could cancel out the current bullish momentum, with the risk of a fall toward the 100-period Simple Moving Average (SMA) on the 4-hour chart before the channel's lower boundary at 97.00.