Core PCE Report to Test Fed's Resolve on Interest Rates

The upcoming US Core PCE report on Wednesday will be closely watched by traders and investors as it may influence the Federal Reserve's decision on interest rates. The report is expected to show a 0.3% month-over-month increase in core PCE, which would leave the annual rate around 3.3-3.4%. A hotter-than-expected reading could strengthen the case for another rate hike at the October meeting.

The technical outlook for the US Dollar Index is also being closely watched, with a potential breakout above 102.00 if inflation expectations are high. On the other hand, any signs of cooling inflation may be brushed off as stale and lead to only a short-term dip in the dollar.

Consumer demand will also be an important part of the report, with personal income expected to rise around 0.5% and spending forecasts clustered around 0.8-0.9%. A strong spending print would suggest households remain resilient despite higher rates, potentially making the Fed less comfortable assuming inflation will cool on its own.

The stakes are high for this report as it is the last Core PCE release before the October meeting, where traders are pricing in 70% odds of a rate hike. A hot inflation print and strong spending would favor the October debate moving in a more hawkish direction, while an in-line report would keep both October and December options on the table.