PCE inflation data for August is unlikely to change the Fed’s stance on interest rate cuts

VaselineSeptember 27, 2024

0 4 minutes read

PCE inflation data for August is unlikely to change the Fed’s stance on interest rate cuts

The core price index for personal consumption expenditures is seen rising 0.2% month-on-month and 2.7% year-on-year in August.
Markets have already priced in nearly 50 bps of easing in the next two Federal Reserve meetings.
A firm PCE result is unlikely to change the Fed’s stance on policy.

The US Bureau of Economic Analysis (BEA) is due to release the key personal consumption expenditure (PCE) price index, which is the Federal Reserve’s preferred measure of inflation, at 12:30 GMT on Friday.

While this PCE inflation data may influence the very near-term path of the US dollar (USD), it is highly unlikely to change the Fed’s course on the interest rate path.

PCE Anticipation: Insights into the Federal Reserve’s Key Inflation Gauge

The core PCE price index is expected to rise 0.2 percent in August from a month earlier, in line with July figures. Over the trailing twelve months, core PCE is expected to have increased by 2.7%, up slightly from July’s 2.6% increase.

This core PCE price index, which excludes the more volatile food and energy categories, plays a crucial role in shaping market expectations for the Federal Reserve’s interest rate outlook. Both the central bank and market participants closely monitor this measure because it is not distorted by base effects and provides a clearer picture of underlying inflation by excluding volatile components.

On headline PCE, consensus forecasts suggest the downward trend will continue in August, with monthly PCE expected to rise 0.1% (down from 0.2% previously) and an annual increase of 2, 3% (down from 2.5% previously).

Reviewing the PCE inflation report, analysts at TD Securities argued, “Core PCE inflation likely remained under control in August, with prices rising at a mild 0.15% m/m pace. Given that shelter price strength has acted as a key driver of core CPI inflation, core PCE will not rise as much. Headline PCE inflation probably printed 0.10% m/m. Separately, we expect personal spending to moderate, rising 0.2% m/m and 0.1% m/m in real terms.”

How will the Price Index for Personal Consumption Expenditure affect EUR/USD?

The greenback is cruising at the lower end of its multi-month range south of the 101.00 barrier, with an initial dispute around 100.20 so far.

Following the Fed’s rate cut at its Sept. 17-18 meeting, investors now see about 50 basis points of easing for the rest of the year and between 100 and 125 basis points through the end of 2025.

A surprise on the PCE release should barely impact dollar price action as market participants have already turned their attention to next week’s crucial non-farm payrolls amid the Fed’s broader shift to the labor market at the expense of progress around inflation.

According to Pablo Piovano, senior analyst at FX Street.com, “fresh upward momentum should motivate EUR/USD to challenge the year-to-date high of 1.1214 (September 25). Once this region is cleared, the spot could reach the 2023 high of 1.1275 recorded on July 18.”

“On the downside, the September low at 1.1001 (September 11) appears to be reinforced by the provisional 55-day SMA at 1.1009 ahead of the weekly low of 1.0949 (August 15),” adds Pablo.

Finally, Pablo suggests that “above the 200-day SMA of 1.0873, the pair’s constructive outlook should remain unchanged.”

Economic indicator

Personal consumption expenditure – Price index (L/M)

Personal consumption expenditures (PCE), published monthly by the US Bureau of Economic Analysis, measures changes in the prices of goods and services purchased by consumers in the United States (US). The MoM figure compares prices in the reference month to the previous month. Price changes may cause consumers to switch from one good to another, and the PCE Deflator may take such substitutions into account. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US dollar (USD), while a low reading is bearish.

Frequently asked questions about inflation

Inflation measures the increase in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month (month-on-month) and year-on-year (YoY). Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that 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 the prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change from month to month (month-to-month) and year-to-year (year-to-year). Core CPI is the figure targeted by central banks because it excludes volatile food and fuel inputs. When core CPI rises above 2%, higher interest rates usually result, and vice versa when it falls below 2%. Because 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 increases the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a profitable place to park their money.

Previously, gold was the asset investors turned to during periods of high inflation because it held its value, and while investors will often buy gold for its safe haven properties during periods of extreme market turbulence, this is not the case with most of the time. . This is because when inflation is high, central banks will raise interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold versus an interest-bearing asset or putting money in a cash deposit account. On the other hand, lower inflation tends to be positive for gold as it lowers interest rates, making the shiny metal a more viable investment alternative.

VaselineSeptember 27, 2024

0 4 minutes read