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- US Core PCE Inflation Preview: Federal Reserve preferred price gauge looks set for another decline in December
US Core PCE Inflation Preview: Federal Reserve preferred price gauge looks set for another decline in December
- The Core Personal Consumption Expenditures Price Index is set to rise 0.2% MoM and 3% YoY in December.
- Markets see a strong chance of the Federal Reserve keeping the policy rate unchanged in January and March.
- The continued cooling of PCE inflation could cause the US Dollar to remain fragile.
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 13:30 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 0.2% on a monthly basis in December, up slightly from a 0.1% increase recorded in November. December Core PCE is also projected to grow at an annual pace of 3%, down from November’s 3.2%. The headline PCE Price Index is forecast to rise 2.6% (YoY).
Previewing the PCE inflation report, “[W]e look for December PCE data to continue supporting the idea of inflation deceleration, with the core series advancing at a near-trend 0.2% m/m — and below the core CPI's 0.3% increase,” said TD Securities analysts in a weekly report titled “Week Ahead: US Macro Market Movers.”
When will the PCE inflation report be released, and how could it affect EUR/USD?
The PCE inflation data is slated for release at 13:30 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.
Nevertheless, the PCE inflation figures are unlikely to offer any significant surprises since the quarterly figures were already included in the Gross Domestic Product (GDP) report published on Thursday. On a quarterly basis, the Core PCE Price Index rose 2% on a quarterly basis in the fourth quarter, matching the market estimate and the third quarter’s increase.
Hence, market participants could pay close attention to underlying details, namely Personal Spending and Personal Income readings for December.
Personal Spending is expected to rise by 0.4% on a monthly basis following November’s 0.2% increase. In the same period, Personal Income is forecast to increase 0.3%. In case both of these data releases disappoint, investors could see it as a sign of weakening consumption that weighs on the US Dollar (USD) for the immediate reaction. On the other hand, upbeat figures are likely to support the USD in the near term.
FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:
“The Relative Strength Index (RSI) indicator on the daily chart edged lower to 40 after failing to stabilize above 50, reflecting the lack of buyer interest. The 200-day Simple Moving Average (SMA) aligns as a pivot level for EUR/USD at 1.0850. In case this level is confirmed as resistance, 1.0780-1.0770 (Fibonacci 50% retracement of October-December uptrend) could be seen as the next bearish target ahead of 1.0700 (Fibonacci 61.8% retracement).
On the upside, strong resistance seems to have formed at 1.0930-1.0950 (20-day SMA, 50-day SMA, Fibonacci 23.6% retracement) before 1.1000 (psychological level, static level).”
Economic Indicator
United States 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.
Read more.Next release: 01/26/2024 13:30:00 GMT
Frequency: Monthly
Source: US Bureau of Economic Analysis
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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.
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