US Inflation and Policy Expectations

In September, inflation in the United States increased to 3%, up from 2.9% in August, as reported by the US Bureau of Labor Statistics. The Consumer Price Index (CPI) rose by 0.3% for the month, while the core CPI, which excludes food and energy prices, went up by 0.2%. The US Dollar faced pressure from inflation data that was lower than expected, causing the USD Index to fall by 0.12% to 98.80. The dollar weakened against major currencies, especially the New Zealand Dollar. The US Bureau of Labor Statistics had predicted a CPI increase of 3.1% for September, which could influence monetary policy. The Federal Reserve is likely to lower the policy rate by 25 basis points soon. High inflation usually boosts a currency’s value, as central banks may raise interest rates to control it. This attracts more foreign investment due to higher returns. On the other hand, low inflation can decrease a currency’s value, resulting in fewer investments. Gold, seen as a safe haven asset, typically reacts oppositely to inflation. High inflation can lead to higher interest rates, making gold less appealing. Conversely, low inflation can make gold more attractive due to lower opportunity costs.

Future Market Expectations

The latest inflation report for September 2025 showed that the Consumer Price Index (CPI) increased to 2.8% year-over-year, which was slightly higher than the expected 2.6%. This persistent inflation, along with a robust jobs report from early October that added 210,000 jobs, indicates that the Federal Reserve will likely maintain high interest rates. We should not expect any loosening of monetary policy soon. When we look back, the market reacted differently to similar data in the past. For example, in the fall of 2019, an annual inflation rate of 3% coincided with strong market expectations for the Fed to actually *cut* rates. Today, with inflation close to that level, the focus is solely on how long the Fed will maintain elevated rates, reflecting the significant shift in the economic landscape. This suggests we should brace for more market volatility in the coming weeks as traders adapt to the reality of “higher for longer” rates. The CBOE Volatility Index (VIX) has already begun to rise from its recent lows and is now around 18, indicating increasing uncertainty. We may want to adopt strategies that capitalize on this volatility, such as buying straddles on major equity indices. In this environment, the US Dollar is likely to continue its upward trend. With the Federal Reserve remaining steadfast, while other central banks like the European Central Bank show signs of caution due to weaker economic performance, the dollar has a clear advantage. Betting on a stronger dollar, especially against the Euro using currency derivatives, appears to be a wise strategy. The market has largely ruled out any chance of a rate cut before mid-2026. This view is echoed in the Secured Overnight Financing Rate (SOFR) futures, which indicate that short-term rates will stay stable for at least the next two quarters. As a result, any derivative positions that expect short-term interest rates to remain at or near their current levels should perform well. Create your live VT Markets account and start trading now.

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