According to a report released on Friday by the US Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) Price Index showed a 2.6% annual increase in inflation in November. This report came in below the 2.8% market expectation and followed the 2.9% increase (reduced from 3% in October).
With food and energy prices removed, the Core PCE Price Index increased 3.2% during the same period, compared to 3.4% in October. The Core PCE Price Index climbed by 0.1% every month, while the PCE Price Index decreased by 0.1%.
According to the publication’s additional details, personal spending and income increased by 0.2% and 0.4%, respectively.
Response of the market to US PCE inflation data
In comparison to its main competitors, the US Dollar’s (USD) performance doesn’t appear to be much impacted by these readings. The USD Index was down 0.13% for the day at 101.65 at the time of publication.
In November, the Core Personal Consumption Expenditures Price Index is expected to increase by 3.3% YoY and 0.2% MoM.
The Federal Reserve could lower the policy rate as early as March, according to the markets.
The US Dollar may continue to be brittle if PCE inflation continues to decline.
The US Bureau of Economic Analysis (BEA) will release the Core Personal Consumption Expenditures (PCE) Price Index, the preferred inflation indicator of the US Federal Reserve (Fed), at 13:30 GMT on Friday.
What may one anticipate from the favored PCE inflation report of the Federal Reserve?
When it comes to Fed positioning, the Core PCE Price Index—which does not include volatile food and energy prices—is thought to be the more significant indicator of inflation. The index is expected to expand by 0.2% monthly in November to match the gain in October and by 3.3% annually, which is less than the 3.5% growth observed in October.
The headline PCE Price Index is expected to increase by 2.8% annually while remaining stable every month in November.
Fed Chairman Jerome Powell discussed the Fed’s expectations for the impending PCE statistics during the press conference that followed the December policy meeting:
We estimate that throughout the year ending in November, total PCE prices increased by 2.6%, with core PCE prices increasing by 3.1% when the volatile food and energy categories were taken out, based on data from the Consumer Price Index and other sources.
Powell’s admission that politicians were debating whether it would be acceptable to begin reducing interest rates startled the market. At the press conference held after the meeting, he continued, “We are very focused on not making the mistake of keeping rates too high for too long.” As a result, the yield on US Treasury bonds fell precipitously, and the US dollar lost a lot of ground to its main competitors. Markets are still pricing in a nearly 80% probability that the Fed will lower the policy rate by 25 basis points in March, despite Fed policymakers’ attempts to buck market expectations for a policy pivot in the first quarter of next year, according to the CME Group’s FedWatch Tool.
A concise synopsis of the PCE inflation report is provided by TD Securities analysts: core PCE inflation significantly underperformed the core CPI in November, rising by 0.28%, and probably fell in November to its lowest monthly pace since the end of 2020 (headline: 0.0% m/m). We also observe a 0.1% m/m slowdown in the PCE’s supercore metric. In addition, after a weak October, consumer spending probably increased in Q4; in November, expenditure increased at a very firm m/m pace (+0.5% in real terms).
What impact might the PCE inflation report have on EUR/USD, and when will it be released?
At 13:30 GMT, the PCE inflation data is expected to be released. The monthly Core PCE Price Index gauge is the one that the Fed prefers to use to measure inflation since it is free from base effects and gives a clear picture of underlying inflation by removing volatile items. As a result, investors closely monitor the monthly Core PCE statistics.
If monthly Core PCE inflation increases more than anticipated, investors will probably lower their expectations for a March Fed rate cut. Chairman Powell’s disclosure of the Fed’s prediction for the annual Core PCE Price Index growth, however, is below the consensus of the market, indicating a slim possibility of an upside surprise.
However, a negative report or no change in the monthly Core PCE Price Index might add to the USD’s woes and heighten anticipations for a rate drop in March.
However, with trade volumes declining ahead of the Christmas holiday, the financial markets may get unpredictable, and it could be dangerous to acquire a big position based on this information.
Eren Sengezer, an analyst at FXStreet, provides a quick technical forecast for the EUR/USD and explains:
Indicating that the pair is still bullish, the Relative Strength Index (RSI) indicator on the daily chart stays above 50 and the EUR/USD pair stays inside an ascending regression trend channel.
The psychological level, or static level, 1.1000, lines up as the first point of resistance on the upswing. If the daily close stays above that level, there may be room for a leg higher towards 1.1100, which is the upper limit of the ascending channel, and the Fibonacci 78.6% retracement of the August–October downturn. The next positive goal, 1.1275 (the high from July 18), can be considered after this level is verified.
Before 1.0760–1.0750 (the 50-day and 100-day Simple Moving Averages), the 20-day SMA establishes temporary support at 1.0800 (the lower edge of the ascending channel).