What to Know

  • Strong US growth has kept another Federal Reserve rate hike in focus as markets wait for the August PCE inflation report.
  • The S&P Global US flash composite PMI rose to 58.4 in September from 56.0 in August, the strongest reading since July 2021.
  • The 10 year Treasury yield stood at 5.17% on Friday, while the two year yield was at 4.81%.
  • The Federal Reserve September projections placed the median policy rate at 4.1% by year end, pointing to one more quarter point increase if the outlook holds.
  • August PCE inflation data due on September 30 is the next major test before the Federal Reserve meeting on October 27 and October 28.
  • The US Dollar Index traded near 100.87 on Friday and needs a break above 101.80 to extend its rally.
  • USD/JPY traded near 157.29, with technical traders watching the 160 to 162 area as a possible upside trigger.
  • EUR/USD traded near 1.139, with chart watchers focused on support between 1.1370 and 1.1330.

US Growth Keeps the Federal Reserve Rate Debate Alive

Strong US business activity has put the Federal Reserve back at the center of global currency trading. The latest US flash composite PMI from S&P Global rose to 58.4 in September from 56.0 in August, marking the strongest reading since July 2021. That kind of expansion signal gives policymakers room to remain patient, but it also makes it harder for markets to dismiss the risk of further tightening if inflation proves sticky.

Companies also reported faster hiring and a sharp rise in input costs. For the Federal Reserve, that combination matters because solid demand, resilient labor conditions and rising costs can all feed into the inflation outlook. Even if policymakers prefer to wait for more evidence, the growth backdrop means another rate hike remains in play if price data does not cool convincingly.

The picture is not one sided. Durable goods orders in August were virtually unchanged, giving the Federal Reserve a weaker factory sector signal to weigh against stronger survey data. This tension is central to the current policy debate. The US economy is showing enough momentum to justify caution on inflation, but not every data point is confirming the same strength.

Treasury Yields Above 5% Raise the Stakes

The bond market has already reflected the pressure. On Friday, the two year Treasury yield stood at 4.81%, while the 10 year Treasury yield reached 5.17%. The gap between the two widened to 0.3 percentage points during the week, steepening the curve as investors priced concern around inflation, borrowing costs and policy risk.

The Federal Reserve September projections placed the median policy rate at 4.1% at year end. That implies one more quarter point increase if the outlook remains intact. For currency markets, the question is whether incoming inflation data will validate that path or encourage investors to believe the central bank can remain on hold.

The Atlanta Fed GDPNow model estimates 5.0% annualized real growth for the third quarter, up from 1.5% growth recorded in the second quarter. Current dollar GDP grew at an 8.0% annualized rate in the second quarter. If real growth remains close to the GDPNow estimate while price growth stays firm, nominal growth could move into double digits. Some market participants argue that if 10 year yields hold above 5%, the risk of another move toward 6% could increase, though that outcome remains dependent on inflation and growth data.

August PCE Inflation Is the Next Major Test

The August PCE report due on September 30 is now the key event for traders assessing the Federal Reserve outlook. PCE inflation was 3.7% in July, while core PCE inflation was 3.3%. The September household survey showed one year inflation expectations rising to 4.6%, and Brent oil traded near $104 a barrel on Friday. These details keep attention fixed on whether price pressure is broad enough to justify additional action.

The Federal Reserve has room to wait, but the window is narrowing before the October 27 and October 28 meeting. A firm August PCE reading could strengthen the case for another rate hike and keep Treasury yields elevated. A softer reading would give policymakers more support for holding rates steady, especially if they judge that previous increases are still working through the economy.

Higher interest rates also carry fiscal consequences. Gross debt exceeded $40 trillion in September, while federal interest payments ran at about $1.25 trillion at an annualized rate in the second quarter. That does not dictate the Federal Reserve decision, but it adds to the broader market sensitivity around sustained high yields.

US Dollar Index Faces a Breakout Test Near 101.80

Higher US interest rates generally support the dollar by improving returns on dollar assets. However, the relationship is not automatic. The US Dollar Index eased to about 100.87 on Friday even as 10 year Treasury yields pushed above 5%. That divergence shows that currency traders are waiting for confirmation from inflation data and policy expectations rather than simply following yields higher.

Technical traders are focused on the upper boundary of the recent consolidation zone between 96.50 and 101.80. The index has crossed above 100.50, but a break above 101.80 is viewed as necessary to open further upside. A double bottom pattern above 98.60 suggests positive momentum, while the index remains above its 50 and 200 day simple moving averages.

If the US Dollar Index breaks above 101.80, chart watchers see scope for a stronger rally toward 104.60. Monthly chart observers also point to consolidation within an ascending channel and a gain of 1.63% in September so far. Still, uncertainty remains because the 10 month moving average is below the 20 month moving average. If the index breaks below 96, some technical traders would expect a stronger decline toward 90.

USD/JPY Watches the Federal Reserve and Bank of Japan Gap

USD/JPY remains highly sensitive to the gap between US and Japanese interest rates. The Bank of Japan raised its policy rate to about 1.25% in September and said further increases depend on economic and inflation data. Even after that move, US rates remain much higher than Japanese rates, which continues to support the dollar against the yen.

USD/JPY traded near 157.29 on Friday as the yen found some strength. A stronger US inflation reading could lift the pair if traders increase expectations for another Federal Reserve rate hike. By contrast, clearer evidence that the Bank of Japan may raise rates again could pull the pair lower by narrowing rate expectations.

From a technical perspective, USD/JPY has been trading within an ascending channel pattern since the lows in January 2023. Chart watchers see the structure as constructive while the pair holds that formation. A break above the 160 to 162 area would likely attract attention as a possible trigger for a rally toward 175, a target associated with resistance in the ascending channel pattern.

EUR/USD Nears a Key Support Zone

EUR/USD is also being shaped by relative central bank expectations. The European Central Bank raised interest rates in September and pushed the deposit rate to 2.50%. Eurozone business activity improved as well, with the composite PMI rising to 53.1 from 52.0, signaling stronger activity in the region.

EUR/USD traded near 1.139 on Friday. A stronger US PCE report would likely favor the dollar if investors conclude that the Federal Reserve may tighten faster than the European Central Bank. The euro could recover if US inflation cools or if eurozone data strengthen the argument for additional European Central Bank action.

The rally in the US Dollar Index during September has pushed EUR/USD toward the support zone between 1.1370 and 1.1330. Technical traders view a break below 1.1330 as a possible signal for a stronger decline toward 1.11. On the other side, a break above 1.17 would be needed to challenge the triangle pattern and open a possible path toward 1.19.

What Currency Traders Are Watching Next

The immediate focus is clear. The Federal Reserve has strong growth data, elevated yields and persistent inflation pressure to consider. At the same time, weaker durable goods orders and the lagged effects of previous rate increases give policymakers reasons to avoid rushing. That makes the August PCE report the decisive near term test.

For the dollar, 101.80 is the key technical level on the US Dollar Index. A breakout could reinforce bullish dollar momentum and put further pressure on EUR/USD while supporting another USD/JPY test of the 160 to 162 zone. If inflation cools, the dollar could lose support even with strong growth, especially if traders reduce expectations for another Federal Reserve increase.

FXCOINZ will continue monitoring the interaction between PCE inflation, Treasury yields and central bank guidance. The currency market is likely to remain sensitive to every data point that changes the balance between growth resilience and inflation risk.

Frequently Asked Questions (FAQs)

Why is the August PCE report important for the Federal Reserve outlook?

The August PCE report is important because PCE inflation is a key measure watched by the Federal Reserve. A firm reading could strengthen the case for another rate hike, while a softer reading could support holding rates steady.

What was the latest US composite PMI reading?

The S&P Global US flash composite PMI rose to 58.4 in September from 56.0 in August. It was the strongest reading since July 2021 and pointed to solid business activity.

Why are Treasury yields affecting the dollar?

Higher Treasury yields can support the dollar by making dollar assets more attractive to investors. However, the relationship is not automatic because currency markets also react to inflation data, central bank expectations and global rate comparisons.

What level matters most for the US Dollar Index?

Technical traders are watching 101.80 as a key resistance level. A break above that area could open the way for a stronger rally, while a drop below 96 would raise the risk of a deeper decline.

How could PCE inflation affect USD/JPY?

A strong PCE reading could increase expectations for another Federal Reserve rate hike and support USD/JPY. A clearer signal of another Bank of Japan hike could pressure the pair by improving the yen outlook.

What are the key USD/JPY technical levels?

USD/JPY traded near 157.29 on Friday. Technical traders are watching the 160 to 162 zone, with a break above that area potentially opening a move toward 175.

What are the important EUR/USD levels?

EUR/USD traded near 1.139 on Friday, with support watched between 1.1370 and 1.1330. A break below 1.1330 could point toward 1.11, while a move above 1.17 would be needed to open a possible path toward 1.19.

Did the European Central Bank also raise rates?

Yes. The European Central Bank raised interest rates in September and pushed the deposit rate to 2.50%, adding another layer to the comparison between US and eurozone policy expectations.

What should traders watch after the PCE report?

Traders should watch how Treasury yields and the US Dollar Index respond. The reaction around 101.80 in the dollar index, 160 to 162 in USD/JPY and 1.1330 in EUR/USD may help define the next phase of the currency move.