- The core Personal Consumption Expenditures Price Index is forecast to rise 0.3% MoM and 2.9% YoY in July.
- Headline annual PCE inflation is set to remain unchanged at 2.6%.
- Markets broadly expect the Federal Reserve to cut the policy rate by 25 bps in September.
The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for July on Friday at 12:30 GMT.
The PCE index is closely watched by market participants because it is the Federal Reserve’s (Fed) preferred measure of inflation and could influence the policy outlook.
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Anticipating the PCE: Insights into the Federal Reserve’s key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.3% month-over-month (MoM) in July, at the same pace as seen in June.
Over the last twelve months, the core PCE inflation is set to tick up to 2.9% from 2.8% in June. Meanwhile, the headline annual PCE inflation is seen holding steady at 2.6% in this period.
Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.
While speaking at the annual Jackson Hole Economic Symposium earlier in the month, Fed Chairman Jerome Powell adopted a relatively dovish tone. Powell acknowledged that downside risks to the labor market were rising and said that it was a reasonable base case for the inflation effects of tariffs to be short-lived. He also shared the Fed’s inflation projections for July, noting that the latest data indicated that the annual PCE inflation and core PCE inflation rose 2.6% and 2.9%, respectively.
Previewing the PCE inflation report, TD Securities said:
“We look for core PCE prices to accelerate in July to 0.30% m/m. Headline will likely moderate to 0.22% due to weak food and energy inflation. Y/Y inflation should be 2.9% and 2.6%, respectively. July saw moderate passthrough of tariffs into goods prices but an acceleration in services. We forecast personal spending to increase 0.5% as core retail sales were strong.”
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar (USD) maintains a neutral stance after weakening against its rivals in the immediate reaction to Powell’s remarks, as markets now nearly fully price in a 25 basis points Fed rate cut at the next meeting in September.
The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, the market reaction could remain short-lived, with Powell’s speech diminishing the surprise factor. Nevertheless, a reading of 0.5% or higher in this data could trigger a USD rally and weigh on EUR/USD, while a print of 0.2% or lower could have the opposite impact on the pair’s action.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly above 50 and EUR/USD fluctuates at around the 20-day and the 50-day Simple Moving Averages (SMAs), pointing to a lack of directional momentum.”
“The lower limit of an ascending regression channel coming from January forms an immediate support at 1.1600 (static level, round level) before 1.1500 (100-day SMA) and 1.1400 (static level, round level). Looking north, 1.1800 (static level, round level) could be seen as the next resistance ahead of 1.1950 (mid-poit of the ascending channel).”
Economic Indicator
Core Personal Consumption Expenditures – Price Index (MoM)
The Core 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 PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The MoM figure compares the prices of goods in the reference month to the previous month.The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
