The Personal Consumption Expenditures (PCE) report delivered a significant surprise, with headline PCE inflation climbing to 4.1% year-over-year in May, marking the fastest pace since April 2023 according to Bureau of Economic Analysis data released Thursday. Core PCE inflation excluding food and energy rose 3.4% from a year earlier, while inflation-adjusted consumer spending increased 0.3% from the previous month. This represents a substantial acceleration from the previously expected 0.5% headline PCE inflation rise and 3.4% core PCE rate, demonstrating the strength of underlying price pressures in the U.S. economy. The data shows Americans are powering through the fallout from the Iran war, with consumers maintaining spending momentum despite rising prices. As per Reuters, the PCE price index rose 4.1% in the 12 months through May, up from 3.8% in April, with the reading matching economists' expectations in a Reuters poll. US personal spending increased by 0.7% in May 2026, amounting to $156.1 billion, surpassing April's revised 0.4% rise and market forecasts of 0.6%, with spending on goods up by $61.8 billion and services seeing an increase of $94.3 billion.
The Fed's monetary policy stance has shifted significantly, with nine out of 19 policymakers now expecting an interest rate hike this year, according to the Fed's Economic Projections released Wednesday. This represents a sharp turnaround from no officials supporting the need to tighten monetary policy conditions in the prior Economic Projections report released in March. As reported by Investing.com India, December 2026 Fed funds futures remain above 4%, suggesting the market is still reluctant to price in a more aggressive easing cycle despite the recent decline in energy prices. The rebound in durable goods inflation has become a significant driver of core PCE and represents a meaningful change in the inflation backdrop, potentially requiring the Fed's current policy stance to be more restrictive than previously anticipated. U.S. money markets now fully price a quarter-point rate rise in October, having recently priced this scenario for as late as March 2027, according to LSEG data. Markets expect a rate hike anytime between September and December, and at least two hikes over the next 12 months, with the Fed's new chair Kevin Warsh stating that price stability will be the focus. Monte Safieddine, Head of Market Research at Capital.com, notes that "inflation pressure is not cooling fast enough, while growth remains stronger than expected, reducing the urgency for Fed rate cuts. The dollar should stay bid, gold may struggle as real-yield expectations remain firm."
The Dollar Index trades higher at around 101.5, holding around its highest levels in more than a year and up over 4% in the last 12 months, according to The Financial Express. The near-term bias remains bullish as price holds above the 20-day exponential moving average at 99.89. According to Investing.com India, the Dollar Index now breaking above resistance around 100.50, there appears to be scope for further gains in the months ahead. USD/JPY remains one of the most dangerously positioned currency pairs in the FX market, having now returned to its July 2024 high near 161.60. The Relative Strength Index at 68.93 hovers just below overbought territory, hinting that upside momentum remains strong but may be approaching a fatigue zone. A daily close below the 20-day EMA would signal waning bullish pressure and open the door to a deeper correction, with the next major support zone at 99.38. Looking up, the spot could extend the advance towards the one-year high around 102.00 if it manages to rise above the June 19 high at 101.13.
A separate report showed the U.S. economy grew at an annualized 2.1% pace in the first quarter, faster than previously estimated, according to NDTV Profit. This economic resilience, combined with the accelerating inflation data, suggests the Fed may have more room to tighten monetary policy than previously anticipated. The weekly chart shows very little meaningful resistance above the July 2024 highs, with some resistance around 164, but beyond that, the next notable levels do not appear until roughly 181 and then above 200. As reported by Investing.com India, this setup should make Japanese government officials increasingly nervous, as the higher USD/JPY rises, the greater the risk of intervention, particularly given the speed at which the pair could advance once it moves into a zone with limited historical resistance. Personal income increased $181.6 billion (0.7 percent at a monthly rate) in May, with disposable personal income (DPI) increasing $164.9 billion (0.7 percent) and personal consumption expenditures (PCE) increasing $156.1 billion (0.7 percent). Personal saving was $704.2 billion in May, with the personal saving rate at 3.0 percent.
This week, reserve balances fell back below the $3 trillion level, driven by a rise in the Treasury General Account (TGA) to around $950 billion following the June 15 tax date. According to Investing.com India, Treasury is targeting a TGA balance of about $900 billion by month-end, so reserves are likely to increase somewhat in the days ahead, but not by a meaningful amount. Treasury bill paydowns will total $21.8 billion on Tuesday and $12.1 billion on Thursday, after which these paydowns will quietly fade away next week. Jobless claims decreased by 12,000 to 215,000 in the third week of June, the lowest in four weeks and below expectations of 225,000, though continuing claims rose by 21,000 to 1,821,000 in the first week of June, the highest in three months. Despite higher claim counts compared to early Q2, the figures remain strong historically.
