Dollar firms before PCE inflation figures

The dollar index remained above 98.4 on Friday, consolidating after two straight sessions of gains, as traders positioned cautiously ahead of the release of the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge. The reading will be a key input in shaping expectations for monetary policy over the final stretch of 2025.

Thursday’s economic data highlighted the resilience of the US economy. Weekly jobless claims fell by 14,000 to 218,000, well below consensus forecasts, reinforcing the view that companies remain reluctant to shed workers despite signs of softer demand.

At the same time, revised GDP figures showed the economy expanded at an annualized 3.8% in Q2, the strongest pace in nearly two years, fueled by robust household consumption. Together, the data suggested that while growth momentum remains solid, inflationary pressures and labor market stickiness could limit the Fed’s room for aggressive easing.

Markets continue to anticipate a 25-basis-point rate cut at the Fed’s October meeting. However, expectations for the scale of easing this year have moderated: futures now price in about 39 basis points of cuts across the remaining two meetings, down from 43 basis points earlier in the week. Recent Fed commentary has underscored a cautious approach, with officials emphasizing the need to balance inflation risks with emerging signs of labor market weakness.

The dollar index is on track for a weekly gain of nearly 1%, its strongest performance in almost two months. The greenback has strengthened against most major peers, particularly the euro and sterling, as traders recalibrated rate-cut expectations. Safe-haven demand amid geopolitical uncertainties, including heightened tensions in Eastern Europe and the Middle East, also lent support. However, the dollar’s rally has been more measured against the yen and Swiss franc, reflecting broader defensive positioning.

Attention now turns to the August PCE inflation print due later in the day. A hotter-than-expected reading could dampen hopes of rapid policy easing and extend the dollar’s rebound, while a softer figure would likely reignite speculation about deeper cuts before year-end. Beyond US data, investors are also watching for developments around the potential government shutdown, which has added another layer of uncertainty to fiscal and monetary policy outlooks.