The annual core PCE inflation in the US remained stable at 2.8% in June, aligning with the previous month’s rate. This was above expectations of 2.7%.
The overall PCE Price Index increased to 2.6% in June, up from a revised 2.4% in May. This was higher than anticipated, with market predictions set at 2.5%.
Month On Month Data
Both the PCE Price Index and the core variant rose by 0.3% month-on-month. Personal Income and Personal Spending also showed a monthly growth of 0.3% in June.
Following the data release, the US Dollar Index remained steady, trading near 99.90. The currency’s weekly performance showed strength against the euro, but varied against other major currencies.
Understanding inflation metrics like PCE and CPI is key for economic analysis. Inflation impacts the value of a currency; typically, higher inflation leads to central banks raising interest rates. This can lead to a stronger currency as more capital inflows are attracted.
Conversely, inflation influences gold prices by affecting interest rates. High rates often make gold less appealing compared to interest-bearing assets, whereas lower rates can make it more attractive.
Fed Policy And Market Impact
Given this June 2025 inflation data, we should anticipate the Federal Reserve will maintain its “higher for longer” stance on interest rates. The core PCE, stubbornly holding at 2.8%, makes a near-term rate cut highly unlikely. Looking at the CME FedWatch Tool, the market has now almost entirely priced out a rate cut for the September 2025 meeting, with probabilities for a hold jumping to over 90%.
This reinforces our view that the US dollar will remain strong, particularly against currencies whose central banks are less aggressive. Recent manufacturing PMI data from Germany, which came in at a contractionary 48.5 earlier this month, suggests the European Central Bank may need to consider easing policy sooner than the Fed. We see opportunities in buying call options on the US dollar or put options on the EUR/USD pair to capitalize on this divergence.
For gold, the outlook is less favorable as it offers no yield. With the 10-year Treasury yield holding firm above 4.1% following this report, the opportunity cost of holding gold has increased. We saw a similar dynamic back in late 2023 when persistent inflation kept rates elevated and put sustained pressure on gold prices.
This environment creates uncertainty for equity indexes, which could lead to choppiness in the coming weeks. While strong consumer spending is a positive for corporate earnings, the prospect of sustained high interest rates is a headwind for company valuations. The CBOE Volatility Index, or VIX, has been hovering near a low of 14, suggesting the market may be underpricing the risk of a sharp move following the next major economic data release.
