Core PCE inflation softens to 2.6% as forecast

Inflation in the US, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, edged lower to 2.6% on a yearly basis in May from 2.7% in April, the US Bureau of Economic Analysis reported on Friday. This reading came in line with the market expectation. On a monthly basis, the PCE Price Index was unchanged in May.

The core PCE Price Index, which excludes volatile food and energy prices, rose 2.6% in the same period, down from the 2.8% increase recorded in April. Monthly core PCE Price Index rose 0.1%.

Other details of the report showed that Personal Income grew 0.5% on a monthly basis in May, while Personal Spending rose 0.2%.

Follow our live coverage of the US PCE inflation data and the market reaction.

Market reaction to US PCE inflation data

The US Dollar Index, which tracks the US Dollar's valuation against a basket of six major currencies, edged lower with the immediate reaction. At the time of press, the index was down 0.1% on the day at 105.80.

US Dollar PRICE Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Australian Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.05%	-0.12%	-0.18%	-0.03%	-0.30%	-0.15%	0.06%
EUR	0.05%		-0.07%	-0.12%	0.06%	-0.25%	-0.10%	0.12%
GBP	0.12%	0.07%		-0.06%	0.08%	-0.19%	-0.04%	0.15%
JPY	0.18%	0.12%	0.06%		0.13%	-0.14%	0.00%	0.23%
CAD	0.03%	-0.06%	-0.08%	-0.13%		-0.28%	-0.13%	0.07%
AUD	0.30%	0.25%	0.19%	0.14%	0.28%		0.15%	0.35%
NZD	0.15%	0.10%	0.04%	-0.01%	0.13%	-0.15%		0.19%
CHF	-0.06%	-0.12%	-0.15%	-0.23%	-0.07%	-0.35%	-0.19%

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 US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Economic Indicator

Personal Consumption Expenditures - Price Index (YoY)

The 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 YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

PCE index: What to expect in the Federal Reserve’s preferred inflation measure

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 0.1% on a monthly basis in May, at a softer pace than the 0.2% increase recorded in April. May core PCE is projected to grow at an annual pace of 2.6%, while the headline annual PCE inflation is also forecast to edge lower to 2.6%.

The US Bureau of Labor Statistics (BLS) reported earlier in the month that the Consumer Price Index (CPI) rose 3.3% on a yearly basis in May, while the core CPI increased 3.4% in the same period, down from 3.6% in April.

Previewing the PCE inflation report, “CPI and PPI data suggest core PCE inflation lost further momentum in May, with the series advancing 0.13% m/m — its lowest monthly gain of the year and following a 0.25% April expansion,” TD Securities analysts said. “We also look for the headline PCE and the supercore to print 0.0% each in May. Separately, personal spending likely advanced 0.3% m/m, with income rising 0.4%”, they added.

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 currently price in a 37.7% probability of the Federal Reserve (Fed) leaving the policy rate unchanged in September. This market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event.

In case the monthly core PCE rises 0.2%, or more, in May, the immediate market reaction could cause investors to refrain from pricing in a rate reduction in September and help the USD outperform its rivals. On the other hand, a reading of 0.1%, or lower, could trigger a USD selloff ahead of the weekend and open the door for a leg higher in EUR/USD.

Investors, however, could remain reluctant to bet on a steady recovery in the Euro ahead of the first round of French elections on Sunday, even if the PCE inflation figures make it difficult for the USD to find demand. In addition, the data will be released on the last trading day of the second quarter. Hence, quarter-end flows and position adjustments could ramp up market volatility and cause the USD to move irregularly.

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

“Despite several recovery attempts seen in the last couple of weeks, the Relative Strength Index (RSI) indicator on the daily chart stays below 50, reflecting buyer’s hesitancy. Furthermore, EUR/USD remains within the descending regression channel coming from early June.”

“1.0740 (upper limit of the descending channel) aligns as first resistance. Once EUR/USD rises above this level and stabilizes there, 1.0790-1.0800 (100-day Simple Moving Average (SMA), 200-day SMA, psychological level) could be seen as the next resistance before 1.0900. On the downside, 1.0660 (mid-point of the descending channel) aligns as first support before 1.0600 (lower limit of the descending channel).”

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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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