US Core PCE Inflation Set to Edge Higher as Markets Anticipate Fed Rate Cut
Overview: PCE Inflation and the Federal Reserve’s Next Move
The United States (US) Bureau of Economic Analysis (BEA) is poised to release the core Personal Consumption Expenditures (PCE) Price Index on Friday at 12:30 GMT. As the Federal Reserve’s (Fed) preferred inflation gauge, the core PCE Index plays a crucial role in shaping market expectations and influencing the US Dollar (USD) trajectory. Markets are closely watching this data release, as it could set the tone ahead of next week’s Nonfarm Payrolls report.
Expected Data and Market Implications
The core PCE Price Index is expected to rise by 0.2% month-on-month (MoM) in July, maintaining the same pace as in June. On a year-on-year (YoY) basis, core PCE is projected to grow by 2.7%, while the headline PCE inflation is anticipated to tick higher to 2.6% during the same period. This inflation measure excludes volatile food and energy prices, provides a clearer picture of underlying inflation trends and is closely monitored by both the Fed and market participants.
Earlier this month, data from the Bureau of Labor Statistics (BLS) revealed that the US Consumer Price Index (CPI) increased by 2.9% YoY in July, with core CPI rising by 3.2% YoY—a slight deceleration from June’s 3.3% increase. These figures, combined with the anticipated PCE data, will heavily influence the Fed’s decisions regarding interest rates.
Market Sentiment and Potential Impact on the US Dollar
Markets have already fully priced in a rate cut by the Fed in September, with the majority expecting a 25 basis points (bps) reduction. However, if the PCE inflation data comes in hotter than expected, it could challenge these expectations, offering a potential lifeline to the US Dollar, which has been trading near yearly lows against its major rivals. A stronger-than-anticipated PCE reading might dampen hopes for aggressive rate cuts this year, leading to a possible rally in the USD.
Conversely, if the core PCE figures show a slower-than-expected increase, the USD could face further downward pressure, potentially leading to a fresh leg higher in the EUR/USD pair. The EUR/USD has been on an uptrend, reaching its highest level in thirteen months, hovering near 1.1200. The initial market reaction to the PCE report may be muted, as traders might prefer to reassess their positions on the last trading day of the week while awaiting next week’s critical US employment data.
Technical Analysis: EUR/USD Outlook
From a technical standpoint, the EUR/USD pair remains in a bullish trend, provided it stays above the key support level of 1.1107 on a daily closing basis. This level represents the 23.6% Fibonacci Retracement of the August rally, which saw the pair rise from 1.0775 to the 13-month high of 1.1202. The 14-day Relative Strength Index (RSI) continues to trade well above 50, signaling ongoing bullish momentum.
To challenge the next psychological resistance level at 1.1250, the EUR/USD pair would need to close above the 13-month high of 1.1202 daily. However, a sustained break below the 1.1107 support could expose the pair to further downside risks, with the next support level aligned at the 38.2% Fibonacci Retracement at 1.1045.
Navigating Market Uncertainty
As markets brace for the upcoming core PCE inflation data, the potential outcomes present a complex landscape for traders. A hotter-than-expected PCE reading could provide a much-needed boost to the US Dollar, potentially reversing some of its recent losses. On the other hand, weaker-than-expected data might reinforce expectations of a more dovish Fed, leading to further gains for the EUR/USD pair.
With the Nonfarm Payrolls report on the horizon, traders will likely approach the PCE data cautiously, understanding that the Fed’s policy direction remains in flux. As the market digests these critical economic indicators, the interplay between inflation expectations, Fed policy, and technical levels will continue to drive currency movements in the days ahead.
