US Core PCE Inflation Preview: Federal Reserve preferred price gauge expected to slow in October

• The Core Personal Consumption Expenditures Price Index is set to rise 0.2% MoM and 3.5% YoY in October.
• Recent Federal Reserve commentary cements bets of a dovish pivot next year.
• The continued cooling of PCE inflation could exacerbate the pain in the US Dollar. 

The Core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published by the US Bureau of Economic Analysis (BEA) on Thursday at 13:30 GMT.

What to expect in the Federal Reserve’s preferred PCE inflation report?

The Core PCE Price Index, which excludes food and energy, is seen as the more influential in terms of Fed positioning. It is seen increasing 0.2% on a monthly basis in October, as against a 0.3% rise in September, and at an annual pace of 3.5%, down from the 3.9% increase seen in September.

The headline PCE Price Index is set to rise 0.1% MoM in October while accelerating by 3.0% annually in the reported month after recording a 3.4% growth in September.

Meanwhile, the United States’ real Gross Domestic Product (GDP) expanded at an annualized rate of 5.2% in the third quarter, the second estimate reported by the BEA showed on Wednesday. The GDP data registered a sharp upward revision from the preliminary reading of 4.9%. Additional details showed that the PCE inflation was revised down to 2.8% on a quarterly basis in Q3 from 2.9% first readout while the Core PCE inflation was downgraded to 2.3% in Q3 from the flash estimate of 2.4%.

In the lead-up to the US PCE inflation showdown, markets are pricing a roughly 49% chance that the Fed could begin slashing rates as early as March. This is substantially higher compared with the 21.5% chance seen on Tuesday, according to CME Group’s FedWatch Tool. About 100 bps worth of cuts are also priced in for next year.

Recent dovish comments from Fed Governor Christopher Waller, a known hawk, flagged a policy pivot and bolstered Fed rate cut bets for next year, spelling disaster for the US Dollar and the US Treasury bond yields.

"I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%," Waller said in his speech on Tuesday. If the decline in inflation continues "for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower," he added. Chicago Fed President Austan Goolsbee on Tuesday expressed concerns about keeping rates too high for too long.

These dovish commentary contrast with Fed Chair Jerome Powell’s hawkish remarks delivered earlier this month at an International Monetary Fund (IMF) event. Powell said that the Fed "is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time; We are not confident that we have achieved such a stance," adding that “if it becomes appropriate to tighten policy further, we will not hesitate to do so."

Analysts at BBH offer a sneak peek at what to expect from the upcoming PCE inflation data:

“Data highlight will be October PCE data Thursday.  Headline PCE is expected at 3.1% y/y vs. 3.4% in September, while core PCE is expected at 3.5% y/y vs. 3.7% in September.  If so, the headline would be the lowest since March 2021 but still well above the Fed’s 2% target. Of note, the Cleveland Fed’s Nowcast model sees headline PCE at 3.09% y/y and core PCE at 3.55% y/y.”

When will be the PCE inflation report 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 the underlying inflation by excluding volatile items. Investors, therefore, pay close attention to the monthly Core PCE figure. A bigger-than-expected increase in monthly PCE inflation is likely to prompt investors to dial down Fed rate cut expectations for next year, lifting the US Dollar from multi-month troughs against its major counterparts. Even if the Core PCE Price Index comes out in line with estimates the Dollar could still find some support.

Conversely, softer US monthly PCE inflation data could exacerbate the pain in the US Dollar. Even though PCE inflation is a lagging indicator, it could still add to the dovish Fed pivot bets. However, the reaction to the PCE figures is expected to be limited, as traders would refrain from placing fresh directional bets on the Greenback ahead of Fed Chair Jerome Powell’s speech on Friday. 

Powell is scheduled to participate in a fireside chat titled "Navigating Pathways to Economic Mobility" at Spelman College, in Atlanta. It will be his last public appearance, as the Fed enters the ‘blackout period’ on Saturday ahead of the December 12-13 policy meeting.

FXStreet Analyst Dhwani Mehta offers a brief technical outlook for EUR/USD and explains: “EUR/USD is on a six-day winning streak, close to its best level in three months above 1.1000 following a sustained downtrend in the US Dollar. The Relative Strength Index (RSI) indicator on the daily chart has eased from above the 70 level, suggesting that the pair has room for more upside. A 20-day Simple Moving Average (SMA) and 200-day SMA bullish crossover is in the making, keeping the bullish bias intact for EUR/USD.” 

Dhwani also outlines the important technical levels for trading EUR/USD in the short term: “On the upside, the October high of 1.1065 is envisioned as the initial hurdle. If Euro buyers manage to find a strong foothold above the latter, the next resistance levels are seen at the 1.1100 round level and the July 27 high of 1.1150. Should EUR/USD fail to clear 1.1065, a fresh corrective decline toward Tuesday’s low of 1.0934 cannot be ruled out. Further down, the 1.0900 psychological level could come into play."