PCE inflation data looks key as markets remain divided over size of Federal Reserve cut
- The core Personal Consumption Expenditures Price Index is seen rising 0.2% MoM and 2.7% YoY in July.
- Markets fully price in an interest-rate cut by the US Federal Reserve in September.
- A hotter-than-expected PCE inflation data could rescue the US Dollar ahead of next week’s Nonfarm Payrolls.
The United States (US) Bureau of Economic Analysis (BEA) will release the high-impact core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, on Friday at 12:30 GMT.
The PCE inflation data could shape the next direction for the US Dollar (USD) heading into the Nonfarm Payrolls week.
PCE Index: What to expect from the Federal Reserve’s preferred inflation measure?
The core PCE Price Index is set to rise 0.2% over the month in July, at the same pace as seen in June. On year, core PCE is projected to grow by 2.7%, while the headline annual PCE inflation is seen ticking higher to 2.6% in the same period.
The core PCE Price Index, which excludes volatile food and energy prices, has a significant impact on the market’s pricing of the Fed’s interest rates outlook. The gauge is closely monitored by the central bank and market participants, as it’s not distorted by base effects and provides a clear view of underlying inflation by excluding volatile items.
Data published by the BLS earlier this month showed that the US Consumer Price Index (CPI) rose 2.9% on a yearly basis in July while the core CPI increased 3.2% in the same period, a tad slower than June’s rise of 3.3%.
Previewing the PCE inflation report, “Core PCE inflation likely stayed under control, with prices advancing at a soft 0.13% MoM pace in July. Given shelter price strength acted as a driver of core CPI inflation, the core PCE will not increase as much,” TD Securities analysts said.
“Headline PCE inflation likely printed 0.12% MoM. We also expect personal spending to provide a solid Q3 start, rising firmly at 0.5% MoM and 0.4% MoM in real terms,” they added.
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar is languishing near yearly lows against its major rivals in the lead-up to the release of the Fed’s favorite preferred inflation measure. The Dollar downtrend has propelled the EUR/USD pair to the highest level in thirteen months near 1.1200.
Markets have fully priced in a rate cut by the Fed in September, with the odds leaning in favor of a 25 basis points (bps) rate reduction over a 50 bps move.
In case the monthly or the headline core PCE reading comes in hotter-than-expected in July, the US Dollar is likely to receive a much-needed boost, as the data would pour cold water on recent expectations of aggressive Fed rate cuts this year. In response, the EUR/USD pair could stage a correction from over one-year highs. On the other hand, a slower-than-expected increase in the core figures could trigger a fresh USD sell-off, triggering a fresh leg higher in EUR/USD.
The initial reaction to the PCE report, however, could be limited, as traders might resort to position readjustments on the final trading day of the week while gearing up for the next week’s critical US employment data.
FXStreet’s Analyst Dhwani Mehta offers a brief technical outlook for EUR/USD and explains:
“The EUR/USD uptrend remains intact so long as the 1.1107 support holds on a daily closing basis. That level is the 23.6% Fibonacci Retracement (Fibo) level of the August rally from 1.0775 to 1.1202, 13-month highs. The 14-day Relative Strength Index (RSI) stays firm well above 50, justifying the major’s bullish potential.”
“Acceptance above the 13-month high of 1.1202 is needed on a daily closing basis to challenge the 1.1250 psychological level. Alternatively, a sustained break below the abovementioned 23.6% Fibo support at 1.1107 could open up the downside toward the 38.2% Fibo level of the same advance, aligned at 1.1045.”
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the strongest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.87% | 0.21% | 0.20% | -0.41% | -0.40% | -0.90% | -0.53% | |
| EUR | -0.87% | -0.71% | -0.67% | -1.26% | -1.35% | -1.74% | -1.36% | |
| GBP | -0.21% | 0.71% | -0.06% | -0.62% | -0.66% | -1.11% | -0.72% | |
| JPY | -0.20% | 0.67% | 0.06% | -0.60% | -0.52% | -0.88% | -0.63% | |
| CAD | 0.41% | 1.26% | 0.62% | 0.60% | 0.02% | -0.43% | -0.11% | |
| AUD | 0.40% | 1.35% | 0.66% | 0.52% | -0.02% | -0.41% | -0.02% | |
| NZD | 0.90% | 1.74% | 1.11% | 0.88% | 0.43% | 0.41% | 0.38% | |
| CHF | 0.53% | 1.36% | 0.72% | 0.63% | 0.11% | 0.02% | -0.38% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.