- The Core Personal Consumption Expenditures Price Index is set to rise 0.4% MoM and 2.8% YoY in January.
- Markets see a strong chance of the Federal Reserve keeping the policy rate unchanged in March and May.
- The slowing progress of PCE inflation towards the 2% target could help the US Dollar stay resilient against its rivals.
The Core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published on Thursday by the US Bureau of Economic Analysis (BEA) at 13:30 GMT.
What to expect in the Federal Reserve’s preferred PCE inflation report?
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 0.4% on a monthly basis in January, at a stronger pace than the 0.2% increase recorded in December. January Core PCE is also projected to grow at an annual pace of 2.8%, compared to 2.9% in December. The headline PCE inflation is forecast to soften to 2.4% (YoY).
Previewing the PCE inflation report, “The market remains expectant about the final impact on PCE prices following hot January CPI and PPI inflation,” said Oscar Munoz, Chief US Macro Strategist at TD Securities, in a weekly report. “TD expects those robust increases to result in a solid 0.36% m/m jump for the core PCE. The PCE’s supercore likely also surged but by an even stronger 0.55%.”
When will the PCE inflation report be released, and how could it affect EUR/USD?
The PCE inflation data is slated for release at 13:30 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.
Stronger-than-forecast Consumer Price Index (CPI) and Producer Price Index (PPI) readings in January, combined with the impressive labor market report, revived expectations for the Fed to continue to delay the policy pivot.
The CME FedWatch Tool shows that markets are fully pricing in a no-change in the Fed policy rate in March and see an 85% probability for another hold in May. Although the market positioning suggests that there isn’t much room for additional USD gains in case a strong monthly core PCE reading confirms a Fed policy pause in May, investors could see this data as a sign that could potentially reduce the number of total rate cuts in 2024. Hence, a print above the market expectation could provide a boost to the USD and weigh on EUR/USD.
On the other hand, a softer-than-forecast increase in the monthly core PCE is unlikely to revive expectations for a rate cut in May. Nevertheless, such a reading could help the risk mood improve and allow EUR/USD to edge higher by making it difficult for the USD to hold its ground.
FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:
“The 200-day Simple Moving Average (SMA) and the 100-day SMA form a pivot level for EUR/USD at 1.0820-1.0830. If the pair fails to stabilize above that level, it could target 1.0700 (Fibonacci 61.8% retracement of the October-December uptrend) on the downside. In case EUR/USD confirms 1.0820-1.0830 as support, 1.0900 (psychological level, static level) could be seen as the next bullish target before 1.0950 (Fibonacci 23.6% retracement).”
Economic Indicator
United States 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.
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.
