US FX WRAP: Dollar bid on hot-leaning PCE
USD was bid on a hot-leaning PCE report. Core printed in line with expectations of 0.2% M/M and 3.3% Y/Y; meanwhile, the headline was slightly hot at 0.2% M/M (exp. 0.1%) and 3.7% Y/Y (exp. 3.6%). G10 peers were largely weaker on the day, led by NZD, CHF and GBP. Oil prices were choppy, managing to recoup earlier losses initially driven by optimistic reporting on an imminent US-Iran deal which likely helped support the buck. Keeping oil prices and inflationary concerns heightened was a Bloomberg report that Russian President Putin is looking to escalate the war with Ukraine in response to enduring attacks on energy infrastructure, a situation that will likely lead to a further deterioration in the refined products market.
Other US data included US GDP rising 1.5% in Q2 (unrevised from the advance figure), driven by increases in consumer spending, exports, and investment; Durable Goods beat in July, supporting the theme of solid investment. DXY hit highs of 99.23, still shy of the 99.63 highs seen last week before the US Treasury Buyback announcement.
AUD was the clear G10 outperformer vs USD following inflation data. CPI came in above expectations, remaining above the RBA’s 3% upper inflation target, with the RBA’s preferred measure, trimmed mean, unchanged at 3.6% Y/Y above expectations of 3.5%. AUD/USD hit highs of 0.7189 before trimming to around 0.7172.
A monthly FX wrap of this kind is a summary of an established pattern rather than new information: the dollar's sensitivity to core PCE as the Fed's preferred gauge is well documented, and the split here is instructive. Core printing in line with a headline beat is the less forceful variant of a hot report; episodes where the beat sits in headline but not core have historically produced a bid that fades faster than one driven by core upside, since the policy-relevant signal is the core path. The GDP revision unrevised and a durable goods beat reinforce the resilient-activity backdrop, a combination that typically supports front-end yields and the dollar via the rate differential rather than through any single print. AUD outperforming on its own upside inflation surprise, staying above the RBA target band, fits the recurring pattern where divergence in domestic inflation paths, not the US print itself, drives cross performance; in such cases AUD/USD behaves more as an RBA story than a dollar story. The oil overlay is the two-sided tell: deal optimism on US-Iran has repeatedly proved fragile as a driver of crude, while escalation around Russian energy infrastructure works the other way through refined products and freight, and both feed back into the inflation data that drive these FX moves. Worth observing is whether the dollar holds the bid into the next core prints or retraces, the usual marker of whether a data-day move reflects repositioning or a shift in the expected policy path.