Breaking: US Core PCE inflation edges lower to 4.6% vs. 4.7% expected

Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3.8% on a yearly basis in May from 4.3% in April, the US Bureau of Economic Analysis reported on Friday. This reading came in below the market expectation of 4.6%.

The increase in the annual Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, edged lower to 4.6% from 4.7% in the same period, compared to analysts' forecast of 4.7%. On a monthly basis, Core PCE inflation and PCE inflation rose 0.3% and 0.1%, respectively.

Further details of the report revealed that Personal Income increased 0.4% on a monthly basis as expected and Personal Spending remained unchanged.

Market reaction

The US Dollar came under selling pressure with the initial reaction to soft inflation data. As of writing, the US Dollar Index was down 0.2% on the day at 103.14.

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The section below was published as a preview of the US PCE inflation report at 11:45 GMT. 

• Personal Consumption Expenditures Price Index is expected to rise 4.6% on a yearly basis in May.
• Federal Reserve remains on track to return to a 25 basis points rate hike in July.
• US Dollar could gather strength against its rivals in case core PCE inflation remains hot.

The Core Personal Consumption Expenditures (PCE) Price Index report for May, the Federal Reserve’s (Fed) preferred inflation gauge, will be unveiled by the Bureau of Economic Analysis (BEA) on Friday, June 30 at 12:30 GMT.

How will the Federal Reserve read the PCE inflation report?

The PCE Price Index is forecast to rise 4.6% on a yearly basis in May, slightly stronger than the 4.4% increase recorded in April. The Core PCE Price Index, which excludes volatile food and energy prices, is expected to hold steady at 4.7% with a monthly increase of 0.4%.

The Federal Reserve (Fed) left its policy rate unchanged at the 5%-5.25% range following the June policy meeting. During the post-meeting press conference, FOMC Chairman Jerome Powell explained that the pause in rate hikes did not necessarily mean that they have reached the terminal rate. In fact, the revised Summary of Economic Projections, the so-called dot plot, revealed that the interest rate projection for end-2023 got revised higher to 5.6% from 5.1% in March, implying two more 25 basis points (bps) rate hikes this year.

While speaking at a policy panel at the European Central Bank Forum on Central Banking this week, Powell reiterated that a strong majority of Fed policymakers expected two or more rate increases this year and said that strong labor market conditions would allow them to continue to tighten the policy.

Currently, the CME Group FedWatch Tool shows that markets are pricing in a more than 80% chance of the Fed lifting the interest rate by 25 bps to 5.25%-5.5% in July. The probability of the policy rate reaching the 5.5%-5.75% range by December, however, is less than 30%.

The market positioning suggests that there is potential for the US Dollar (USD) to continue to gather strength on a hot PCE inflation report. Investors will likely pay close attention to the monthly Core PCE Price Index, since it is not distorted by base effects. A reading at or above 0.5% should increase the odds of two more 25 bps Fed rate hikes in the second half of 2023 and provide a boost to the USD. On the other hand, a soft print of 0.2% or lower should make it difficult for the US Dollar to stay resilient against its rivals ahead of the weekend. 

When will the Personal Consumption Expenditures Price Index be released and how could it affect EUR/USD?

The PCE inflation report is scheduled for release at 12:30 GMT, on June 30. Previewing this publication, “the Federal Reserve watches PCE – so financial markets also examine it closely. The higher it goes, the greater the chance for further rate hikes and thus a stronger US Dollar. The Greenback would lose value against its peers on a lower read,” said FXStreet Analyst Yohay Elam.

EUR/USD gathered bullish momentum in June and climbed above 1.1000 before going into a consolidation phase. FXStreet Analyst Eren Sengezer offers a brief technical outlook for the pair and explains: 

“Following EUR/USD lackluster performance this week, the Relative Strength Index (RSI) indicator on the daily chart declined to 50, highlighting a buildup of bearish momentum. Additionally, the pair was last seen trading near the 20- and the 50-day Simple Moving Averages (SMA) after having closed the last 10 trading days above those levels”

Eren also highlights the important technical levels for EUR/USD: “In case the pair turns south on a strong PCE inflation report, a daily close below 1.0850 (50-day SMA, 20-day SMA) could attract sellers. In that case, additional losses toward 1.0800 (psychological level, 100-day SMA) and 1.0700 (end-point of May-June downtrend) could be witnessed.”

“On the upside, 1.1000 (static level, psychological level) aligns as strong resistance before 1.1060 (end-point of March-May uptrend) and 1.1100 (2023-high).”

PCE inflation related content

• US PCE Preview: Three ways this inflation measure impacts your income and summer plans
• Breaking: Eurozone Preliminary HICP inflation falls to 5.5% YoY in June vs. 6.1% forecast
• US Core PCE Preview: FX fallout on stronger inflation print to be limited – MUFG