US core PCE inflation decreased to 2.8% in September, while the US Dollar Index remained slightly lower near 99.00. The PCE Price Index rose by 2.8% annually and 0.3% monthly, consistent with expectations and August’s figures.
The core PCE Price Index, the Federal Reserve’s chosen measure of inflation, dropped to 2.8% year-over-year from 2.9% in August. The US Dollar Index showed minimal response to these statistics, maintaining small daily losses near 99.00.
Understanding Core Inflation
Inflation is the increase in the cost of a representative basket of goods and services, expressed in monthly and yearly percentage changes. Core inflation excludes volatile items like food and fuel, drawing economists’ attention as it is targeted by central banks, typically around 2%.
The Consumer Price Index (CPI) measures price changes over time; when the core CPI exceeds 2%, central banks typically raise interest rates, affecting currency strength accordingly. Conversely, falling inflation can lead to lower rates.
In foreign exchange, high inflation can raise a country’s currency value as central banks hike interest rates to control inflation, attracting global capital. Gold’s value, influenced by investment rates, often drops with high inflation since increased rate opportunities make gold less attractive compared to interest-bearing assets.
Looking back, the core PCE inflation rate of 2.8% from September was a key data point that showed a slow but steady decline. We have now seen the October 2025 report which showed core PCE ticking back up slightly to 3.0%, reminding us that the path to the 2% target is not a straight line. This persistent inflation has been the primary reason the Federal Reserve has held interest rates firm throughout the second half of 2025.
The Changing Economic Landscape
However, the economic narrative is now beginning to change based on more recent data from last month. The November 2025 jobs report indicated a significant cooling in the labor market, with payrolls increasing by only 150,000, which was below forecasts and a marked slowdown from previous months. This is the first clear sign we’ve seen that higher interest rates are starting to weigh on the broader economy.
This has shifted expectations for future Fed policy, with the market now pricing in future rate cuts. The CME FedWatch Tool shows that traders are assigning over a 70% probability of a rate cut by the March 2026 meeting. This is a sharp reversal from just two months ago when the market was still debating the possibility of one final hike.
For traders, this signals a time to consider positioning for a weaker US dollar. As expectations for rate cuts grow, the dollar’s appeal will likely diminish from its recent highs, where the Dollar Index was trading above 107 in October 2025 but has since fallen to around 103.5. Using options to bet against the dollar, such as buying puts on the DXY or calls on EUR/USD, could be a prudent strategy over the coming weeks.
This environment also suggests preparing for increased stock market volatility, even if the general direction is upward. While the prospect of lower rates is typically good for equities, the transition period can be choppy as the market digests signs of a slowing economy. The VIX, a measure of expected volatility, has been low around 14, but we saw it spike above 20 during the banking turmoil of 2023, showing how quickly sentiment can change.
