In September, the Core Personal Consumption Expenditures (PCE) Price Index in the United States increased by 0.2%, matching what experts predicted. This index is important for tracking inflation and shows that consumer spending remained steady during this time.

Market Reactions to PCE Inflation

After PCE inflation cooled down, the Dow Jones Industrial Average went up, indicating hopes for possible interest rate cuts. Gold prices also stayed around $4,200, reflecting expectations of adjustments in Federal Reserve policy. The EUR/USD currency pair saw a slight decline, dropping to around 1.1630 after the U.S. economic data did not significantly impact the market. The GBP/USD faced difficulties as well, falling towards 1.3320 despite a positive shift in U.S. consumer sentiment. In the cryptocurrency market, Bitcoin held steady above $91,000, while Ethereum remained above $3,100 ahead of the Federal Reserve’s upcoming meeting. Even with inflows into XRP ETF, Ripple’s price dropped to $2.06. Looking ahead, many expect the Federal Reserve to cut rates, with discussions about the dot plot and meeting comments generating interest. Other central banks like the RBA, BoC, and SNB will also meet soon, but major surprises are unlikely.

Federal Reserve Rate Cut Expectations

The market is heavily leaning towards the Federal Reserve cutting rates at their meeting on December 10. Futures predictions indicate over a 90% chance of a 25-basis-point cut, marking the third straight cut this quarter. This strong expectation is driving current market movements. September’s core PCE reading of 0.2% shows that inflation is continuing to cool, supporting the Fed’s strategy. This brings the year-over-year inflation rate down to 2.5%, a notable decrease from the highs seen in 2022 and 2023. This consistent cooling gives the central bank ample reason to continue reducing rates. We believe traders should consider purchasing call options on major stock indices like the S&P 500 to benefit from potential gains driven by rate cut optimism. Despite the CBOE Volatility Index (VIX) nearing 18 before the announcement—making options more expensive—this strategy offers a defined risk in a crucial week. It bets that a cautious Fed will trigger a strong rally. The noticeable weakness in the US Dollar, pushing the DXY index below 95, is a significant support for commodities. We expect Gold to stay strong above the $4,200 level, making call options on gold futures an appealing investment. Traders could also directly bet on further dollar decline by buying put options on the US Dollar Index. The main risk in the coming weeks is a surprise from the Fed that leans hawkish, such as keeping rates steady or abruptly stopping the rate cuts. Such a scenario could cause a sharp reversal, boosting the dollar and pressuring equities and gold. Therefore, it’s wise to consider protective put options on long-held equity positions as a safeguard against potential market misjudgment. Create your live VT Markets account and start trading now.

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