The dollar reacted nervously to US spending and inflation data that painted a contradictory picture. The reason is a mixed signal from the Bureau of Economic Analysis. According to the report, real consumer spending rose 0.6% in August—the strongest monthly gain since March 2025, the agency said. However, the Fed's preferred measure, the core personal consumption expenditures index excluding food and energy, rose only 0.2% versus expectations of 0.3%, and July's reading was revised lower.
On a year-on-year basis, the headline index rose 3.4%, matching the revised July figure, while core PCE came in at 3.0% versus the expected 3.3%. The July core figure was revised from 3.3% to 3.0%, and this is the third consecutive month the series has held at exactly 3.0%. Note that inflation has remained above the Fed's 2% goal for more than five years, and the decline in the annual rate has been achieved largely through revisions and methodological changes rather than through current month price dynamics.
The pickup in spending was concentrated in big-ticket purchases—autos and furniture—and in discretionary categories such as apparel, dining, and hotels. A steady labor market and a rising stock market allowed households to push through spending despite high fuel and general price levels. Retailers, auto dealers, and the hospitality sector benefited from this pattern, while the Fed's anti-inflation efforts suffered because resilient demand prevents companies from lowering markups.
US GDP was revised higher: annualized growth in Q2 2026 is reported at 2.2% versus a prior 1.5% estimate, driven by investment, consumer spending, and government outlays. The Q1 print was revised up as well. Strong GDP supports the soft-landing narrative, but borrowers lose since prolonged policy tightening becomes more plausible.
The services sector merits special attention as the stickiest area for the Fed. Month-on-month prices rose for both goods and services, including gasoline, transport, dining, and accommodation. Services inflation, excluding energy and housing, increased 0.4%—the highest since May. That persistence is notable: even with a softer headline profile, the services component indicates the Fed's work on prices is not done.
Recall that the Fed raised rates this month for the first time in three years and is weighing the next step. New York Fed President John Williams said this week there is no rush to hike again. The market agrees on an October pause, yet still prices one hike by year-end. Also, on Wednesday the private sector added 90,000 jobs in September, the best three-month result, while the goods trade deficit unexpectedly widened to its largest since early 2025. Strong hiring feeds incomes, incomes fuel spending, and spending sustains growth and inflation, and that is why the Fed finds it hard to declare an end to the tightening cycle.
In my view, consumers will remain the main engine of the US economy over the coming quarters, but a model in which spending grows faster than incomes will last only until the first signs of hiring weakness. The base case is continued spending growth at a more moderate pace, one additional Fed hike before year-end, and sustained pressure on borrowers. I would not rule out that talk of a policy pivot could return earlier than the market now expects if October income prints fail to grow.
A technical picture for EUR/USD suggests that buyers should consider how to take 1.1346. Only that will allow a test of 1.1379. From there 1.1410 is possible, but doing so without support from major players will be difficult. On the downside, expect any significant buying only around 1.1312. If buyers are absent there, it would be prudent to wait for a fresh low at 1.1284 or to consider longs from 1.1249.
A technical picture for GBP/USD shows that pound buyers need to clear immediate resistance at 1.3270 to target 1.3307; breaking above that will be challenging. The farther target is 1.3341. On a decline, bears will attempt to seize control of 1.3238. If they do, a break of the range will inflict serious damage on bulls and push GBP/USD toward 1.3206 with the prospect of extending to 1.3173.