US Dollar Index posts modest gains to near 98.50, US PCE inflation data looms

• US Dollar Index gains ground to near 98.40 in Friday's early Asian session. 
• The US economy grew at a 3.8% rate in Q2; Initial Jobless Claims tumbled to 218,000 last week. 
• The US August PCE inflation report will be the highlight later on Friday. 

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a stronger note around 98.40 during the Asian trading hours on Friday. The DXY extends the rally to near a three-week high as stronger US economic data would likely restrain the future interest rate cuts by the Federal Reserve (Fed).

The US Gross Domestic Product (GDP) expanded at an annual rate of 3.8% in the second quarter (Q2), the US Bureau of Economic Analysis (BEA) final estimate showed on Thursday. This reading came in stronger than the previous estimate and the expectation of 3.3%. The US Dollar (USD) attracts some buyers in an immediate reaction to the encouraging US economic data. 

Additionally, the US Initial Jobless Claims for the week ending September 20 declined to 218K, compared to the previous reading of 232K (revised from 231K) and below the market consensus of 235K.

Traders will assess mixed signals from Fed policymakers. Kansas City Fed President Jeffrey Schmid said the rate cut was needed to help ensure that the job market remains in a good place. Chicago Fed President Austan Goolsbee noted that he was not eager to do a lot more policy easing while inflation is above target and moving the wrong way. 

Financial markets are now pricing in nearly a 43 basis points (bps) of rate cuts in the remaining two policy meetings this year, although rexmarks from policymakers indicated that the decision will depend on the upcoming inflation and labour data.

Looking ahead, traders will closely monitor the US PCE inflation data later on Friday. The headline US PCE is expected to show an increase of 2.7% YoY in August, while the core PCE is projected to show a rise of 2.9% during the same period. Any signs of softer inflation could strengthen the case for Fed rate cuts and drag the DXY lower.