US Core PCE Preview: Fed's Preferred Price Gauge to Accelerate in January

  • The underlying personal consumption expenditure price index is expected to rise 0.4% MoM and 2.8% YoY in January.
  • Markets see a strong chance that the Federal Reserve will keep the policy rate unchanged in March and May.
  • Slowing PCE inflation progress towards the 2% target could help the dollar hold firm against its rivals.

The core personal consumption expenditure (PCE) price index, the US Federal Reserve's (Fed) preferred measure of inflation, will be released on Thursday by the US Bureau of Economic Analysis (BEA) at 13:30 GMT.

What to expect from the Federal Reserve's preferred PCE inflation report?

He underlying PCE price indexwhich excludes food and energy price volatility, is considered the most influential measure of inflation in terms of the Fed's positioning. The index is expected to rise 0.4% monthly in January, at a stronger pace than the 0.2% increase recorded in December. Core PCE for January is also expected to grow at an interannual rate of 2.8%, compared to 2.9% in December. Headline PCE inflation is expected to soften to 2.4% year-on-year.

While awaiting the report on PCE inflation, “the market remains expectant about the final impact on PCE prices after the strong inflation of the CPI and the PPI in January,” declared Óscar Muñoz, chief US macroeconomic strategist at TD Securities, in a weekly report, “TD expects those strong increases to translate into a solid 0.36% MoM rally for core PCE.” The PCE supercore is also likely to rise, but by an even stronger 0.55%.”

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

PCE inflation data will be released at 13:30 GMT. The monthly core PCE price index is the Fed's preferred inflation indicator as it is not distorted by base effects and provides a clear view of core inflation by excluding volatile items. Therefore, investors pay special attention to the monthly underlying PCE data.

Stronger-than-expected readings of the Consumer Price Index (CPI) and Producer Price Index (PPI) in January, along with the impressive labor market report, revived expectations that the Fed would continue to delay the turnaround. of its monetary policy.

The CME's FedWatch tool shows that markets are fully pricing in the possibility of no change to the Fed's policy rate in March and see an 85% chance of it holding in May. Although market positioning suggests there is not much room for additional USD gains should a strong monthly core PCE reading confirm a pause in Fed policy in May, investors could view this data as a signal that could reduce the total number of rate cuts in 2024. Therefore, a data above market expectations could give a boost to the USD and weigh on EUR/USD.

On the other hand, a lower-than-expected rise in monthly core PCE is unlikely to revive expectations of a rate cut in May. However, such a reading could help improve risk sentiment and allow EUR/USD to rise, making it difficult for the USD to hold firm.

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

“The 200-day SMA and the 100-day SMA form a fundamental level for EUR/USD in 1.0820-1.0830. If the pair fails to stabilize above that level, it could bearishly target the 1.0700 (61.8% Fibonacci retracement of the October-December uptrend). Should EUR/USD confirm 1.0820-1.0830 as support, the level of 1.0900 (psychological level, static level) could be considered the next bullish target before 1.0950 (23.6% Fibonacci retracement)”.

Frequently asked questions about the Fed

What does the Federal Reserve do and how does it affect the dollar?

The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the Federal Reserve's 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the United States a more attractive place for international investors to place their money.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.

How often does the Federal Reserve hold monetary policy meetings?

The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions.
The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.

What is Quantitative Easing (QE) and how does it affect the USD?

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged 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 of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.

What is Quantitative Tightening (QT) and how does it affect 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 capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.

Source: Fx Street

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