US core PCE inflation seen lower in June as Federal Reserve assesses timing of first rate cut
|- The core Personal Consumption Expenditures Price Index is foreseen up 0.1% in June.
- The Federal Reserve is widely anticipated to trim interest rates in September.
- The EUR/USD pair is on the brink of turning bearish in the mid-term.
The United States will release June Personal Consumption Expenditures (PCE) Price Index figures on Friday. The Federal Reserve’s (Fed) favourite inflation gauge will be released by the US Bureau of Economic Analysis (BEA) at 12:30 GMT.
Ahead of the announcement, the country published the preliminary estimate of the Q2 Gross Domestic Product (GDP), which largely surpassed the market’s expectations. The economy grew at an annualized pace of 2.8%, according to the flash Q2 GDP, while inflation in the same period was lower than previously estimated. The core Personal Consumption Expenditures Price Index rose 2.9% QoQ, easing from the 3.7% posted in the first quarter, yet above expectations of 2.7%. Finally, the GDP Price Index rose 2.3% in the same period, below the market expectation of 2.6%.
Overall, the figures anticipate that price pressures continued to ease at the end of the second quarter, although inflation remains above the Federal Reserve’s goal of 2%.
PCE Price Index: What to expect from the Federal Reserve’s preferred inflation measure
The core PCE Price Index, which excludes volatile food and energy prices, is forecast to rise 0.1% MoM in June, matching the May figure. The PCE Price Index is also projected to grow at an annual pace of 2.5%, slightly below the previous 2.6%, although still above the Fed’s 2% goal.
The expected figures will align with the recent Fed Chairman Jerome Powell's mildly dovish stance, exacerbating bets for two interest rate cuts before year-end. Chair Powell surprised market players recently by downgrading his hawkish tone. Speculative interest rushed to price in a 25 basis points (bps) rate cut in September while slowly lifting bets of a similar move in December.
Ahead of the release, it is worth reminding that the US reported that the Consumer Price Index (CPI) declined 0.1% MoM in June, while the annual index increased 3%, down from the previous 3.3%, according to the US Bureau of Labor Statistics (BLS). The continued improvement in inflation provided additional support to rate-cut bets.
When will the PCE inflation report be released, and how could it affect EUR/USD?
PCE inflation figures will be released on Friday at 12:30 GMT, and as previously noted, expectations point to another step down towards the Fed’s 2% target. Given the quarterly PCE figures released on Thursday, the report may have a limited impact on the US Dollar, moreover, if the outcome aligns with expectations.
The USD should come under selling pressure on lower-than-anticipated readings, as such figures will further support the case of a dovish central bank. The opposite scenario is also valid, with higher-than-expected figures leaning the scale towards a more hawkish Fed and delayed rate cuts. As a result, the Greenback may extend gains ahead of the weekly close.
Ahead of the announcement, the EUR/USD pair maintains its weak tone. After posting a multi-month high of 1.0947 in mid-July, the pair entered a selling spiral that pushed it towards this week’s low at 1.0824.
From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “The EUR/USD pair is at the brink of turning bearish. The daily chart shows EUR/USD battling a bullish 20 Simple Moving Average (SMA), with a clear extension below it, probably encouraging sellers. At the same time, the 100 and 200 SMAs remain directionless in the 1.0790 price zone, with a break below it further exacerbating selling interest. Finally, technical indicators have completely retreated from overbought readings and are currently losing their bearish strength at around their midlines, although they are far from confirming the slide is over. Extensions below their midlines will likely anticipate another leg lower, particularly if the pair loses the aforementioned 1.0790 support area.”
Bednarik adds: “At this point, EUR/USD would need to reconquer the 1.0870 region to give bulls a chance. A much more relevant resistance area comes at around 1.0945, a potential bullish target should PCE data put the Greenback in sell-off mode. Still, such a scenario seems quite unlikely, given the recently released quarterly PCE inflation figures.”
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.
Economic Indicator
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.
Read more.Next release: Fri Jul 26, 2024 12:30
Frequency: Monthly
Consensus: 2.5%
Previous: 2.6%
Source: US Bureau of Economic Analysis
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.
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