Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 2.7% on a yearly basis in March from 2.5% in February, the US Bureau of Economic Analysis reported on Friday. This reading came in above the market expectation of 2.6%.
The core PCE Price Index, which excludes volatile food and energy prices, held steady at 2.8% on a yearly basis, surpassing analysts' estimate of 2.6%. On a monthly basis, the PCE Price Index and the core PCE Price Index both rose 0.3%.
Other details of the report showed that Personal Income grew 0.5% on a monthly basis in March, while Personal Spending rose 0.8%.
Market reaction to US PCE inflation data
These readings don't seem to be having a significant impact on the US Dollar's valuation. At the time of press, the US Dollar Index was up 0.12% on the day at 105.70.
US Dollar price this week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Australian Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.70% | -1.09% | -0.69% | -1.83% | 1.33% | -1.04% | 0.09% | |
| EUR | 0.68% | -0.41% | -0.01% | -1.13% | 2.00% | -0.35% | 0.76% | |
| GBP | 1.06% | 0.37% | 0.37% | -0.75% | 2.37% | 0.02% | 1.14% | |
| CAD | 0.68% | -0.02% | -0.38% | -1.14% | 1.99% | -0.36% | 0.76% | |
| AUD | 1.79% | 1.11% | 0.74% | 1.13% | 3.09% | 0.77% | 1.88% | |
| JPY | -1.34% | -2.04% | -2.45% | -2.03% | -3.18% | -2.40% | -1.26% | |
| NZD | 1.02% | 0.34% | -0.05% | 0.35% | -0.80% | 2.32% | 1.10% | |
| CHF | -0.07% | -0.76% | -1.14% | -0.75% | -1.91% | 1.25% | -1.10% |
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 Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
This section below was published as a preview of the US PCE inflation data at 06:00 GMT.
- The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.6% YoY in March.
- Markets see a strong chance of the Federal Reserve keeping the policy rate unchanged in June.
- The market reaction to the data could remain short-lived.
The core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published on Friday by the US Bureau of Economic Analysis (BEA) at 12:30 GMT.
What to expect in the Federal Reserve’s preferred PCE inflation report?
The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in March, matching February’s increase. March core PCE is also projected to grow at an annual pace of 2.6%, while the headline PCE inflation is forecast to tick up to 2.6% (YoY) from 2.5%.
The Federal Reserve’s revised Summary of Economic Projections (SEP), also known as the dot plot – published alongside the policy statement after the March meeting – showed that policymakers expect the annual core PCE inflation to be at 2.6% at the end of 2024, up from the 2.4% forecast seen in the December’s SEP.
On Thursday, the BEA reported that the core PCE Price Index rose 3.4% on a quarterly basis in the first quarter, at a much stronger pace than the 1.8% increase seen in the last quarter of 2023. The initial market reaction to this data helped the US Dollar (USD) gather strength against its rivals. Since the quarterly figures were already unveiled, markets are likely to pay little to no attention to the monthly PCE inflation numbers.
Previewing the PCE Price Index data, “another firm increase in March CPI inflation will likely result in a still firm 0.25% m/m gain for the core PCE — though we flag that the risk to our forecast is to the upside,” said TD Securities analysts in a weekly report and added:
“The PCE's supercore likely rebounded to 0.30% m/m after a modest 0.18% gain in February. Separately, personal spending likely ended the quarter on a strong note, expanding again at a solid pace in March.”
When will the PCE inflation report be released, and how could it affect EUR/USD?
The PCE inflation data is slated for release at 12:30 GMT. The monthly core PCE Price Index gauge is the most-preferred inflation reading by the Fed, as it’s not distorted by base effects and provides a clear view of underlying inflation by excluding volatile items. Investors, therefore, pay close attention to the monthly core PCE figure.
The CME Group FedWatch Tool shows that markets are currently pricing in a higher-than-80% probability that the Fed will leave the policy rate unchanged at 5.25%-5.5% in June. Monthly PCE data for March, however, are unlikely to influence the market expectation in a significant way, especially following the release of the quarterly data. Nevertheless, in case the monthly core PCE Price Index rises less than forecast, the immediate reaction could trigger a short-lasting USD weakness. On the other hand, the market positioning suggests that there isn’t a lot of room left for further USD strength if the data surprise to the upside.
FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:
“The 200-day Simple Moving Average (SMA) and the 50-day SMA form a strong resistance for EUR/USD at 1.0800. As long as this level stays intact as resistance, technical sellers could look to retain control. On the downside, 1.0650 (static level) aligns as interim support before next support at 1.0600 (2024 low set on April 16). In case EUR/USD manages to stabilize above 1.0800, buyers could remain interested and open the door for an extended rebound toward 1.0900 (psychological level, static level) and 1.0950 (static level from March).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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