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

The Australian Dollar led gains across major currencies on Wednesday after hotter-than-expected domestic inflation increased expectations that the Reserve Bank of Australia could raise interest rates again before the end of the year. AUD/USD gained around 0.3%, reaching its strongest level since early June, while the broader U.S. Dollar remained relatively steady as traders avoided aggressive positions ahead of important U.S. inflation data. ## Australian Dollar rises after stronger inflation Australia's July Consumer Price Index increased 1.0% on the month, beating market expectations for a 0.8% rise. Although the annual headline inflation rate eased to 3.5%, underlying price pressures remained persistent. The RBA's preferred trimmed mean inflation measure rose 0.5% during the month, keeping annual core inflation elevated at 3.6%. The stronger underlying inflation figures encouraged traders to increase expectations for another Reserve Bank of Australia rate hike before the end of 2026. Australia's relatively attractive interest-rate carry and its exposure to commodities linked to energy, artificial intelligence infrastructure and defense spending are also helping support the Australian Dollar. However, some market strategists still believe the RBA could keep rates unchanged for longer because policy is already restrictive and signs of weakness are appearing in the labor market. ## U.S. Dollar waits for PCE inflation data The U.S. Dollar Index remained broadly steady, rising around 0.1% to 98.98 and staying close to 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 PCE report is expected to provide an important indication of whether inflation pressures in the United States are continuing to ease or remain persistent. A softer-than-expected reading could strengthen expectations for easier Federal Reserve policy and put additional pressure on the Dollar. A stronger inflation reading could support U.S. Treasury yields and provide the Greenback with short-term support. ## Jackson Hole remains a major catalyst The PCE report represents a major economic checkpoint before Federal Reserve Chair Kevin Warsh's keynote address at the Jackson Hole Economic Policy Symposium on Friday. Traders will closely monitor Warsh's comments for clues about inflation, economic growth and the future direction of U.S. interest rates. Recent U.S. Treasury long-end debt buybacks have helped calm some volatility in bond markets, but concerns surrounding the country's growing federal debt and rising debt-servicing costs continue to limit enthusiasm for the Dollar. U.S. federal debt has moved above $40 trillion, keeping fiscal sustainability among the major concerns affecting currency sentiment. ## Japanese Yen strengthens on BOJ expectations The Japanese Yen gained modestly against the U.S. Dollar, with USD/JPY trading near 158.97. The Yen received support from growing expectations that the Bank of Japan could raise its policy rate as early as September. A recent survey indicated that a majority of economists expect another BOJ rate increase, potentially reducing some of the interest-rate disadvantage that has weighed on the Japanese currency. ## Euro trades in a narrow range The Euro remained relatively stable against the Dollar, trading near $1.1600. European traders continued to assess hawkish comments from European Central Bank policymakers suggesting that further interest-rate increases could still be necessary despite the recent decline in energy prices. Expectations for relatively firm ECB policy may help support the Euro, although traders remain cautious ahead of U.S. inflation data and the Jackson Hole symposium. ## Canadian Dollar pressured by trade tensions The Canadian Dollar remained under pressure as trade tensions between the United States and Canada continued to weigh on sentiment. USD/CAD traded around C$1.3900 after Washington imposed 50% tariffs on approximately $20 billion of Canadian exports. Canada responded with retaliatory tariffs scheduled to take effect on September 8, increasing concerns that the dispute could weigh on economic activity and business confidence. The uncertainty has reduced demand for the Canadian Dollar despite Canada's strong exposure to global commodity markets. ## Oil falls as Middle East tensions cool Broader risk sentiment improved modestly as geopolitical tensions in the Middle East showed signs of easing. Brent crude fell more than 2% toward $87 per barrel following reports that Iran and Oman had resumed bilateral talks concerning commercial transit through the Strait of Hormuz. The prospect of more stable maritime energy flows helped reduce concerns about another major disruption to oil supplies. Lower crude prices could also reduce inflation pressure for energy-importing economies across Asia and other emerging markets. ## Key currency moves EUR/USD traded slightly lower as the Euro remained close to recent levels. USD/JPY edged lower as the Japanese Yen strengthened on expectations for possible Bank of Japan tightening. AUD/USD moved higher after Australia's stronger-than-expected inflation report. USD/CAD advanced as the Canadian Dollar remained under pressure from escalating trade tensions. The U.S. Dollar Index remained near 98.98, while Brent crude fell sharply as Middle East supply concerns eased. ## 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, traders will continue monitoring inflation, employment data and Reserve Bank of Australia guidance for signs that another rate hike is approaching. For the U.S. Dollar, inflation expectations, Treasury yields, fiscal concerns and Federal Reserve policy remain the most important near-term drivers. Until these events provide greater clarity, major currency pairs may continue trading within relatively narrow ranges, while the Australian Dollar remains supported by persistent domestic inflation and expectations for tighter monetary policy.