US dollar climbs as inflation continues to run hot

The US dollar jumped on a stronger PCE inflation reading as the odds of a June Fed hike crossed 50%.

The market is going to have to consider whether the Fed will pause or be forced to resume hiking to 6% or higher. There are some tailwinds coming with US gasoline prices currently 23% below year-ago levels. That will filter into the May/June numbers but with consumers and jobs still hot, it will be tough to get the upper hand on inflation.

USD/JPY led the way in the rally, hitting a session high of 140.31, to marginally crest yesterday’s peak and set a new high for the year. Since then though, it’s returned close to 140.00.

Hawkish Fed expectations, meanwhile, trigger a fresh leg up in the US Treasury bond yields, which, along with the caution mood, further benefits the safe-haven buck and contributes to capping the risk-sensitive Aussie. This, to a larger extent, helps offset the disappointing release of US Durable Goods Orders data, which fell by 0.6% in April vs. a modest 0.1% rise estimated and the 3.2% (revised down from 3.5%) strong growth recorded in the previous month.

With the USD bulls looking to seize back control, speculations that the Reserve Bank of Australia (RBA) might refrain from hiking interest rates in June suggest that the path of least resistance for the AUD/USD pair is to the downside.

Bearish traders, however, might prefer to wait for a sustained break and acceptance below the 0.6500 psychological mark before placing fresh bets. Nevertheless, spot prices remain on track to register heavy weekly losses and record the lowest weekly close since October 2022.