US core PCE inflation set to steady as Federal Reserve rate cut for September hangs in the balance

Source Fxstreet
May 31, 2024 06:00
  • The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in April.
  • Markets see the Federal Reserve keeping the policy rate unchanged in June and July.
  • A soft PCE inflation report could weigh on the US Dollar with the immediate reaction.

The core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published on Friday by the US Bureau of Economic Analysis (BEA) at 12:30 GMT.

PCE index: What to expect in the Federal Reserve’s preferred inflation measure

The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in April, matching March’s  increase. April core PCE is projected to grow at an annual pace of 2.8%, while headline PCE inflation is forecast to hold steady at 2.7% (YoY).

The US Bureau of Labor Statistics reported earlier in the month that the Consumer Price Index (CPI) rose 3.4% on a yearly basis in April, while the core CPI increased 3.6% in the same period, down from 3.8% in March.

Previewing the PCE inflation report, “CPI and PPI data suggest core PCE inflation lost further momentum in April after a strong start to the year,” TD Securities analysts said. “Indeed, we look the core index to advance 0.22% m/m vs 0.32% in March and vs the core CPI's 0.29% April expansion. We've revised our forecast from an initial 0.25% estimate. We also look for the headline to rise 0.23% m/m while the supercore likely cooled to 0.26%.”

When will the PCE inflation report be released, and how could it affect EUR/USD?

The PCE inflation data is slated for release at 12:30 GMT. The monthly core PCE Price Index gauge is the most-preferred inflation reading by the Fed, as it’s not distorted by base effects and provides a clear view of underlying inflation by excluding volatile items. Investors, therefore, pay close attention to the monthly core PCE figure.

The CME Group FedWatch Tool shows that markets currently see virtually no chance of a Fed interest rate cut either in June or July. The probability of the US central bank leaving the policy rate unchanged in September stands at around 48%. 

The market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event. In case the monthly core PCE rises more than 0.3% in April, the immediate market reaction could cause investors to refrain from pricing in a rate reduction in September and help the USD outperform its rivals. On the other hand, a reading of 0.2%, or lower, could trigger a USD selloff ahead of the weekend and open the door for a leg higher in EUR/USD. 

FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:

“Although EUR/USD edged lower in the first half of the week, the Relative Strength Index (RSI) indicator on the daily chart holds slightly above 50, highlighting a lack of bearish pressure. Following the uptrend that ended on May 16, the pair stabilized above the 1.0780-1.0800 region, where the 50-day, 100-day and 200-day Simple Moving Averages (SMA) are located. If EUR/USD drops below that area and starts using it as resistance, technical sellers could take action. In this scenario, 1.0700 (psychological level, static level) could be seen as the next bearish target before 1.0600 (2024-low set on April 16).”

“On the upside, resistances are located at 1.0900 (static level, psychological level), 1.0950 (static level) and 1.1000 (psychological level, static level). For buyers to remain interested, however, the 1.0780-1.0800 area needs to stay intact as support.”

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Read more.

Last release: Fri Apr 26, 2024 12:30

Frequency: Monthly

Actual: 2.8%

Consensus: 2.6%

Previous: 2.8%

Source: US Bureau of Economic Analysis

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.


 

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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