- The Underlying Price Index for Personal Consumption Expenditure (PCE) will increase 0.2% month-on-month and 3.3% year-on-year in November.
- Markets see a strong possibility that the Federal Reserve will cut the monetary policy rate as early as March.
- The continued cooling of inflation as measured by the PCE index could cause the US dollar to remain fragile.
The Underlying Price Index for Personal Consumption Expenditure (PCE), the preferred inflation measure of the US Federal Reserve (Fed), will be published on Friday by the US Bureau of Economic Analysis (BEA) at 13:30 GMT.
What can we expect from the Federal Reserve’s report on inflation as measured by the PCE index?
The Core Personal Consumption Expenditure (PCE) Price Index, which 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 0.2% monthly in November, matching the increase in October, and at an annual rate of 3.3%, below the 3.5% growth recorded in October.
Headline PCE is expected to remain stable month-on-month in November and increase 2.8% annually.
At the press conference following the December policy meeting, Fed Chair Jerome Powell shared the Fed’s expectations for the upcoming PCE data:
“Based on the Consumer Price Index and other data, we estimate that total PCE prices rose 2.6% in the 12 months ending in November; and that, excluding the volatile food and energy categories, underlying PCE prices they rose 3.1%.”
Powell surprised the market by acknowledging that policymakers were thinking and commenting on when it will be appropriate to start cutting interest rates. “We are very focused on not making the mistake of keeping rates too high for too long,” he added at the press conference after the meeting. In turn, US Treasury bond yields fell sharply and the Dollar suffered large losses against its main rivals. Although Fed policymakers have been trying to counter market expectations of a shift in monetary policy in the first quarter of next year, markets continue to price the probability that the Fed will taper at nearly 80%. the monetary policy rate at 25 basis points in March, according to the CME Group’s FedWatch tool.
TD Securities analysts offer a brief preview of the report on inflation measured by the PCE index:
“Core PCE inflation likely slowed noticeably in November to its softest month-on-month pace since late 2020 (0.0%), falling well below the 0.28% rise in core CPI. We also expect the core PCE measure to slow up 0.1% month-on-month. On the other hand, consumer spending likely rebounded in the fourth quarter after a weak October, and spending advanced at a very firm pace in November (+0.5% in real terms).”
When will PCE inflation be reported 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 elements. Therefore, investors pay close attention to the monthly underlying PCE data.
A larger-than-expected rise in monthly core PCE inflation will likely prompt investors to lower expectations for a Fed rate cut in March. However, the Fed’s forecast, revealed by Chairman Powell, for the annual rise in the underlying PCE price index is below market consensus, suggesting there is a small chance for an upside surprise.
On the other hand, if there were no change in the monthly underlying PCE price index, or if the data were negative, the Dollar would be more affected and expectations of a rate cut in March would increase.
However, ahead of the Christmas holidays, activity in financial markets could become volatile due to reduced trading volumes, and it could be risky to take a large position based on this data.
FXStreet analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:
“EUR/USD remains within an ascending regression trend channel, and the Relative Strength Index (RSI) on the daily chart remains above 50, suggesting that the pair remains bullish.”
“On the upside, 1.1000 (psychological level, static level) is lined up as the first resistance. A daily close above that level could open the door to an upward leg towards 1.1100, where the 78.6% retracement is located “Fibonacci trend of the August-October downtrend and the upper limit of the ascending channel. Once this level is confirmed, 1.1275 (July 18 high) could be the next bullish target.”
“The 20-day SMA forms tentative support at 1.0800 (lower boundary of ascending channel) ahead of 1.0760-1.0750 (50-day SMA, 100-day SMA).”
Inflation FAQ
What is inflation?
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a percentage of inter-monthly and inter-annual variation. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
What is the impact of inflation on currency exchange?
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
