US core PCE inflation set to signal firm price pressures as markets delay Federal Reserve rate cut bets

• 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).