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).”