Financial markets are bracing for a US inflation report that could lock in expectations for a Federal Reserve interest rate hike as soon as September. The Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index for May on Thursday at 12:30 GMT, and the numbers are widely expected to show price pressures heating up once again.
What the May PCE data is expected to show
The core PCE Price Index, which strips out volatile food and energy costs and is the Fed's preferred inflation gauge, is forecast to rise 0.3% on a monthly basis in May, up from the 0.2% increase recorded in April. Over the 12 months through May, core PCE inflation is seen edging higher to 3.4%.
The headline annual PCE figure is projected to climb to 4%, which would mark its highest level since May 2023. Energy costs are expected to do much of the heavy lifting on the headline reading.
A September rate hike is back on the table
According to the CME FedWatch Tool, traders are now pricing in roughly a 65% chance that the Fed will lift borrowing costs by at least 25 basis points by September, a sharp shift in sentiment toward tighter policy.
The Fed's own projections point the same way. The revised Summary of Economic Projections, published alongside the policy statement after the June FOMC meeting, showed policymakers expect PCE inflation to finish the year at 3.6%, with core PCE at 3.3%.
A TD Securities analyst laid out the case for a firm reading:
“We expect core PCE prices to show strong services inflation in May despite weak goods prices, as tariff passthrough has largely dissipated. Headline PCE will be higher at 0.49% m/m due to energy prices. Our forecast assumes 0.55% m/m for supercore after a strong PPI for the month. We look for personal spending to grow 0.5%, which reflects a moderation in real terms to 0.0%.”
Why the dollar is on a tear
The US Dollar Index, which measures the greenback against a basket of six major currencies, has gained more than 2.5% in June and recently pushed above 101.50 to its strongest level in over a year. Several forces are behind the rally: hawkish revisions in the Fed's projections, cautious and ambiguous remarks on the policy path from new Fed Chairman Kevin Warsh, and a run of surprisingly upbeat US economic data, all of which stoked bets on a rate hike.
What it means for EUR/USD
For traders to meaningfully rethink the Fed's path, a softer PCE print on its own may not do the trick. A downside surprise in the monthly core figure could cap the dollar's advance and let EUR/USD hold its ground in the near term, though any such bounce is likely to fade quickly. On the other hand, a reading of 0.4% or higher would supercharge September hike bets and could push EUR/USD deeper into its downtrend.
On the charts, support sits at 1.1300, followed by 1.1220 and 1.1150. If the pair recovers, resistance is seen around 1.1410/1.1400, then 1.1540 at the Bollinger Bands mid-point, and 1.1660 to 1.1670, where the upper Bollinger band lines up with the 200-day and 100-day Simple Moving Averages.
The dollar's grip on global finance
The US Dollar is the official currency of the United States and the de facto currency of many other countries where it circulates alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to 2022 data. After the Second World War, the dollar took over from the British Pound as the world's reserve currency. For most of its history it was backed by gold, until the 1971 Bretton Woods Agreement ended the gold standard.
The single biggest factor shaping the dollar's value is monetary policy, set by the Federal Reserve. The Fed has two mandates: price stability, meaning control of inflation, and full employment. Its main tool is adjusting interest rates. When inflation runs above the Fed's 2% target, the central bank raises rates, which supports the dollar; when inflation falls below 2% or unemployment is too high, it may cut rates, which weighs on the greenback.
In extreme situations the Fed can also print more dollars and carry out quantitative easing (QE), sharply boosting the flow of credit through a stuck financial system. It was the Fed's weapon of choice during the 2008 financial crisis, with the central bank printing dollars to buy US government bonds mainly from financial institutions. QE usually leaves the dollar weaker. The reverse process, quantitative tightening (QT), sees the Fed stop buying bonds, and it is generally positive for the dollar.
How other markets are trading
GBP/USD clung to minor recovery gains in the European session on Thursday but stayed below 1.3200, with the potential upside looking limited amid UK political instability and rising expectations of US rate hikes this year.
EUR/USD traded better bid above 1.1350 in European trading on Thursday, helped to stay afloat by a pause in the dollar rally ahead of the PCE release.
Gold rebounded from the vicinity of its lowest level since November 2025, set the previous day, to trade near the $4,000 psychological mark, supported by a modest dollar downtick as investors repositioned before the inflation data.
The broader cryptocurrency market remained under intense selling pressure. Bitcoin slipped back to $60,000 for the third time this year, with on-chain data showing selling by large-wallet investors known as whales, and total liquidations hitting nearly $1 billion over 24 hours.
Ripple (XRP) also stayed under pressure, trading at $1.06 on Thursday after losing nearly 5% over the week, while in the latest live trading it changes hands near $1.08 with a 14-day RSI around 35. Ripple and SBI Group partnered to launch the RLUSD stablecoin in Japan after approval from the Japan Financial Services Agency on Thursday, but the move failed to lift sentiment.
Warsh's debut meeting
Kevin Warsh's first meeting in charge of the Fed left the benchmark rate untouched. The FOMC held its rate at 3.50% to 3.75% for the fourth straight meeting, exactly as priced, and the new chair then used his first press conference to dismantle the framework markets have leaned on for a decade.
