US core PCE inflation fell to 2.8% in September. The US Dollar Index stayed low, just above 99.00. The PCE Price Index increased by 2.8% year-over-year and 0.3% month-over-month, matching expectations and August’s results. The core PCE Price Index, which the Federal Reserve uses to measure inflation, declined to 2.8% from 2.9% in August. The US Dollar Index had little reaction, keeping small daily losses near 99.00.

Understanding Core Inflation

Inflation means that the price of a common basket of goods and services is rising. It’s measured as monthly and yearly percentage changes. Core inflation excludes items like food and fuel, making it a focus for economists since central banks usually aim for around 2%. The Consumer Price Index (CPI) tracks price changes over time. When core CPI exceeds 2%, central banks often raise interest rates, which affects the value of currency. Lower inflation can lead to lower interest rates. In foreign exchange, high inflation can increase a country’s currency value because central banks raise interest rates to manage inflation, attracting global investors. Gold often loses value during high inflation because higher interest rates make gold less appealing compared to assets that earn interest. The core PCE inflation rate of 2.8% in September indicated a slow decline. However, the October 2025 report showed core PCE rose slightly to 3.0%, highlighting that reaching the 2% target won’t be easy. This ongoing inflation is why the Federal Reserve kept interest rates steady during the second half of 2025.

The Changing Economic Landscape

Recent data is altering the economic narrative. The November 2025 jobs report revealed a significant slowdown in the labor market, with only 150,000 new jobs added—below expectations and a stark drop from previous months. This is the first clear sign that higher interest rates are impacting the economy. As a result, market expectations for Federal Reserve policy have shifted, with predictions of future rate cuts now being considered. The CME FedWatch Tool indicates traders see over a 70% chance of a rate cut by March 2026. This is a sharp change from just two months earlier when the market debated one final rate hike. For traders, this could be the right moment to plan for a weaker US dollar. With rate cut expectations rising, the dollar’s attractiveness may decline from recent highs. The Dollar Index was above 107 in October 2025 but has dropped to around 103.5. Using options to bet against the dollar, like buying puts on the DXY or calls on EUR/USD, could be a wise move in the coming weeks. This situation also suggests preparing for increased stock market volatility, even if the overall trend is upward. While lower rates are generally positive for stocks, the adjustment period can be turbulent as the market responds to signs of a slowing economy. The VIX, which measures expected volatility, has been around 14 but spiked above 20 during the 2023 banking crisis, illustrating how quickly sentiment can shift. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now