Dollar treads water ahead of PCE; Aussie gains on hot CPI

The Australian Dollar outperformed major currencies on Wednesday after stronger-than-expected inflation data increased expectations that the Reserve Bank of Australia may raise interest rates again before the end of the year. AUD/USD gained around 0.3% and reached its strongest level since early June, while the broader U.S. Dollar remained relatively steady as traders avoided large positions ahead of key U.S. inflation data. ## Australian Dollar rises after hotter inflation Australia's July Consumer Price Index increased 1.0% on the month, beating market expectations for a 0.8% rise. The annual headline inflation rate eased to 3.5%, but underlying price pressures remained persistent. The RBA's preferred trimmed mean inflation measure rose 0.5% during the month, leaving annual core inflation around 3.6%. The stronger underlying inflation figures prompted markets to increase expectations for another Reserve Bank of Australia rate increase before the end of 2026. Australia's relatively attractive interest-rate environment and its exposure to commodities linked to energy, artificial intelligence infrastructure and defense spending are also providing support for the Australian Dollar. However, some strategists believe the RBA could still maintain rates at current levels for longer because monetary policy is already restrictive and signs of weakness are emerging in the labor market. ## U.S. Dollar waits for PCE inflation data The U.S. Dollar Index remained close to unchanged, trading near 98.98 and staying within range of last week's three-month low. Currency traders are focused on the July Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation measure. The report is expected to provide an important indication of whether U.S. inflation pressures are continuing to ease or remain persistent. A weaker-than-expected PCE reading could increase expectations for easier Federal Reserve policy and put additional pressure on the Dollar. A stronger inflation reading could support Treasury yields and give the Greenback some short-term support. ## Jackson Hole remains a major market catalyst The PCE report comes shortly before Federal Reserve Chair Kevin Warsh's keynote speech at the Jackson Hole Economic Policy Symposium on Friday. Traders will closely examine Warsh's comments for signals about the direction of U.S. monetary policy, inflation risks and the outlook for interest rates. Recent U.S. Treasury debt buybacks have helped reduce some volatility in bond markets, but concerns about the country's federal debt burden and rising debt-servicing costs continue to weigh on sentiment toward the Dollar. U.S. federal debt has risen above $40 trillion, keeping fiscal sustainability at the center of investor concerns. ## Japanese Yen strengthens on BOJ expectations The Japanese Yen gained modestly against the Dollar, with USD/JPY trading near 158.97. The Yen received support from growing expectations that the Bank of Japan could raise interest rates as early as September. A recent survey showed that a majority of economists expect another BOJ policy tightening move, which could reduce some of the interest-rate disadvantage that has weighed on the Japanese currency. ## Euro remains steady The Euro traded in a narrow range against the Dollar near $1.1600. European currency traders continued to assess comments from European Central Bank policymakers suggesting that additional rate increases could still be necessary even as energy prices decline. Expectations for relatively firm ECB policy could help provide support for the Euro, although major moves remain limited ahead of U.S. inflation data and Jackson Hole. ## Canadian Dollar pressured by trade tensions The Canadian Dollar remained under pressure as trade tensions between the United States and Canada continued to affect sentiment. USD/CAD traded around C$1.3900 after Washington imposed tariffs on a significant amount of Canadian exports. Canada has responded with retaliatory measures scheduled to take effect in September, raising concerns that the dispute could weigh on economic activity and business confidence. The uncertainty has reduced demand for the Canadian Dollar despite Canada's exposure to commodity markets. ## Oil falls as Middle East tensions ease Risk sentiment improved modestly after signs of reduced geopolitical tension in the Middle East. Brent crude fell more than 2% toward $87 per barrel following reports that Iran and Oman resumed discussions concerning commercial transit through the Strait of Hormuz. The possibility of more stable energy flows helped ease concerns about another major oil supply disruption. Lower oil prices could also reduce inflation pressure for energy-importing economies across Asia and other emerging markets. ## What forex traders are watching next The immediate focus remains on the U.S. PCE inflation report and Kevin Warsh's Jackson Hole speech. For the Australian Dollar, markets will continue monitoring domestic inflation, employment data and Reserve Bank of Australia guidance for evidence of whether another rate hike is likely. For the U.S. Dollar, inflation expectations, Treasury yields and Federal Reserve policy remain the most important near-term drivers. Until these catalysts provide greater clarity, major currency pairs may continue to trade within relatively narrow ranges, while the Australian Dollar remains supported by stronger domestic inflation and expectations for tighter monetary policy.