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- The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February.
- Markets see a strong chance of the Federal Reserve lowering the policy rate by 25 basis points in June.
- The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.
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.
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 0.3% on a monthly basis in February, at a slightly softer pace than the 0.4% increase recorded in January. February core PCE is also projected to grow at an annual pace of 2.8%, matching the previous reading. The headline PCE inflation is forecast to tick up to 2.5% (YoY).
The Federal Reserve’s revised Summary of Economic Projections (SEP), also known as the dot plot– published alongside the policy statement after the March meeting – showed that policymakers expect the annual core PCE inflation to be at 2.6% at the end of 2024, up from the 2.4% forecast seen in the December SEP.
When commenting on the policy outlook in the post-meeting press conference, Fed Chairman Jerome Powell reiterated that they need greater confidence of inflation moving sustainably down toward the 2% target before they start lowering the policy rate. Powell, however, argued that strong inflation numbers in January were impacted by seasonal effects.
Previewing the PCE inflation report, “Given still robust increases in the Feb CPI/PPI data, we look for another firm gain for the core PCE — though notably down from January’s 0.42% increase and from the core CPI’s 0.36% m/m February gain,” said Oscar Munoz, Chief US Macro Strategist at TD Securities, in a weekly report.
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.
Stronger-than-forecast Consumer Price Index (CPI) and Producer Price Index (PPI) readings in January and February, combined with data that pointed to tight labor market conditions, caused markets to lean toward a delay in the Fed policy pivot from May to June. Nevertheless, the dot plot showed that policymakers still project the US central bank to cut the policy rate by a total of 75 basis points (bps) in 2024. Hence, markets are pricing in a more than 60% chance that the Fed will lower the policy rate by 25 bps to 5%-5.25% in June, according to the CME FedWatch Tool.
It will be tricky to assess the immediate impact of the PCE data on the US Dollar’s (USD) valuation because trading conditions will be thin on Easter Friday.
Even if the monthly core PCE Price Index rises at a stronger pace than expected, it might not be enough to cause investors to reassess the possibility of another policy hold in June. Nevertheless, it could still provide a boost to the USD, with markets doubting the size of the total reduction in the policy rate.
On the other hand, an increase of 0.2% or less in the monthly Core PCE Price Index could weigh on the USD. In this scenario, a bearish opening in the 10-year US yield could be seen when the bond market returns to action at the weekly opening next Monday.
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 strong resistance for EUR/USD at 1.0830. As long as this level stays intact as resistance, technical sellers could look to retain control. On the downside, 1.0760 (Fibonacci 78.6% retracement of the October-December uptrend) aligns as next support before 1.0700 (Fibonacci 61.8% retracement). In case EUR/USD manages to reclaim 1.0830, buyers could take action and open the door for an extended rebound toward 1.0900 (psychological level, static level) and 1.0950 (Fibonacci 23.6% retracement).
Economic Indicator
United States Personal Consumption Expenditures – Price Index (MoM)
The 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 MoM figure compares prices in the reference month to the previous month. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
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Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
