US Dollar Index drifts higher above 100.50, potential upside seems limited ahead of US PCE data

• The US Dollar Index gains traction around 100.65 in Friday’s Asian session. 
• US Durable Goods Orders remained flat in August; US economy grew at an annual rate of 3.0% in Q2. 
• The dovish tone of the US Fed continues to weigh on the Greenback. 

The US Dollar Index (DXY) rebounds to near 100.65 during the Asian trading hours on Friday. The expectation that the Federal Reserve (Fed) will lower its borrowing costs in the future continues to undermine the USD broadly. 

The Fed decided to cut interest rates last week by half a percentage point. Fed Chair Jerome Powell noted that the 50 basis points (bps) reduction was a "recalibration" of rates aimed at maintaining strength in the labor market while inflation moves sustainably to the Fed's 2% goal. 

Fed officials expect to cut interest rates more in the months to come, but they are not on a preset path. This, in turn, might drag the DXY lower in the near term. The markets are now pricing in nearly a 48.8% chance for another outsized half-percentage-point cut, while the odds of 25 bps stand at 51.2%, according to CME Group's FedWatch Tool. 

The upbeat US economic data on Thursday provided some support to the Greenback, but a rally faded as traders shifted the focus to the US inflation data, which is due later on Friday. Analysts estimate the headline Personal Consumption Expenditures (PCE) Price Index to rise 2.3% YoY in August and the core PCE to jump 2.7% YoY in the same period.

Data released by the US Census Bureau revealed that US Durable Goods Orders were unchanged in August versus 9.9% prior, above the market consensus of 2.6%. Meanwhile, the final US Gross Domestic Product (GDP) rose at an annual rate of 3.0% in the second quarter (Q2), as previously estimated. 

Fed Governor Lisa Cook said on Thursday that she endorsed the 50 bps interest rate cut last week as a way to address increased "downside risks" to employment.  Fed Governor Adriana Kugler stuck to the Fed’s dovish tone, saying  “I strongly supported the decision last week by the Federal Open Market Committee (FOMC) to cut the federal funds rate by 50 basis points…If conditions continue to evolve in the direction traveled thus far, then additional cuts will be appropriate.” The dovish stance of the US central bank contributes to the US Dollar Index’s downside.