US headline Personal Consumption Expenditures (PCE) inflation was 2.9% year-on-year in December, according to the US Department of Commerce. Core PCE inflation, which excludes food and energy, was 3.0% year-on-year. On a month-on-month basis, both headline PCE and core PCE rose by 0.4%. Both results were above initial estimates.

Dollar Holds Near Four Week High

After the release, the US Dollar Index (DXY) held steady near 98.00, close to a four-week high. The December 2025 PCE report showed inflation was more persistent than expected. With both headline and core PCE up 0.4% month-on-month, the data suggested the Federal Reserve had little reason to cut interest rates soon. The market reaction supported this view, as the Dollar Index moved toward 98.00. More recent data has strengthened that message. The January 2026 jobs report showed the U.S. economy added a surprisingly strong 225,000 jobs, well above expectations and a sign of ongoing resilience. Then the January CPI report came in at 3.1% year-on-year, suggesting the last mile toward 2% inflation is still difficult. For interest-rate traders, this argues for reassessing positions that rely on near-term rate cuts. The market has already pushed expectations back. Fed funds futures now suggest the first cut is more likely in the third quarter of 2026, not the second. One way to position for fewer near-term cuts is to sell SOFR futures or buy put options on Treasury note futures.

Strategy Implications For Rates And FX

In FX markets, the case for a stronger U.S. dollar over the coming weeks remains intact. If other central banks appear more willing to ease policy, the Fed’s slower pace supports the dollar through a wider interest-rate gap. Options can be used to express this view, such as buying calls on the U.S. Dollar Index (DXY) to target a move above 100.00. This setup is similar to what markets saw in 2023, when stubborn inflation repeatedly pushed traders to delay rate-cut forecasts and supported the dollar. With sticky core PCE in December and strong follow-up data in January, volatility may stay elevated. Traders may consider hedging or taking tactical positions using options on major stock indices as markets adjust to “higher for longer” rates. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now