The annual core PCE inflation in the US stayed steady at 2.8% in June, matching the previous month’s figure. This was higher than the expected rate of 2.7%. The overall PCE Price Index rose to 2.6% in June, up from a revised 2.4% in May. This increase was also above predictions, which were set at 2.5%.

Month-On-Month Data

Both the PCE Price Index and the core version grew by 0.3% from the previous month. Personal Income and Personal Spending also showed a monthly growth of 0.3% in June. After these results were released, the US Dollar Index remained stable, trading around 99.90. The dollar showed strength against the euro, but its performance varied with other major currencies. Understanding inflation measures like PCE and CPI is crucial for economic analysis. Inflation affects currency value; usually, higher inflation prompts central banks to raise interest rates. This can strengthen a currency by attracting more investment. On the other hand, inflation impacts gold prices through interest rates. High rates can make gold less attractive compared to assets that earn interest, while lower rates may increase its appeal.

Fed Policy and Market Impact

With the June 2025 inflation data in mind, it’s likely the Federal Reserve will stick to its “higher for longer” approach on interest rates. The core PCE holding at 2.8% makes a rate cut unlikely in the near future. According to the CME FedWatch Tool, the market has nearly discounted a rate cut for the September 2025 meeting, with the probability of maintaining rates rising to over 90%. This supports our view that the US dollar will remain strong, especially against currencies from less aggressive central banks. Recent manufacturing PMI data from Germany showed a drop to 48.5, indicating the European Central Bank might need to ease policy sooner than the Fed. We see potential in buying call options on the US dollar or put options on the EUR/USD pair to take advantage of this difference. The outlook for gold is less optimistic, as it does not provide a yield. With the 10-year Treasury yield holding above 4.1% after this report, the cost of holding gold has increased. We observed a similar situation in late 2023 when persistent inflation kept rates high, putting pressure on gold prices. This climate creates uncertainty for equity indexes, which may lead to volatility in the coming weeks. While strong consumer spending is good for corporate earnings, the threat of prolonged high interest rates poses challenges for company valuations. The CBOE Volatility Index, or VIX, has been close to a low of 14, indicating the market may be underestimating the risk of a significant shift following the next major economic data release. Create your live VT Markets account and start trading now.

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