US core PCE inflation set to steady at 2.8% in April, risking chances of Federal Reserve rate cuts

  • The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in April.
  • Markets see the Federal Reserve keeping the policy rate unchanged in June and July.
  • A soft PCE inflation report could weigh on the US Dollar with the immediate reaction.

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 12:30 GMT.

PCE index: What to expect in the Federal Reserve’s preferred inflation measure

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 0.3% on a monthly basis in April, matching March’s  increase. April core PCE is projected to grow at an annual pace of 2.8%, while headline PCE inflation is forecast to hold steady at 2.7% (YoY).

The US Bureau of Labor Statistics reported earlier in the month that the Consumer Price Index (CPI) rose 3.4% on a yearly basis in April, while the core CPI increased 3.6% in the same period, down from 3.8% in March.

Previewing the PCE inflation report, “CPI and PPI data suggest core PCE inflation lost further momentum in April after a strong start to the year,” TD Securities analysts said. “Indeed, we look the core index to advance 0.22% m/m vs 0.32% in March and vs the core CPI’s 0.29% April expansion. We’ve revised our forecast from an initial 0.25% estimate. We also look for the headline to rise 0.23% m/m while the supercore likely cooled to 0.26%.”

When will the PCE inflation report be released, and how could it affect EUR/USD?

The PCE inflation data is slated for release at 12:30 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.

The CME Group FedWatch Tool shows that markets currently see virtually no chance of a Fed interest rate cut either in June or July. The probability of the US central bank leaving the policy rate unchanged in September stands at around 48%. 

The market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event. In case the monthly core PCE rises more than 0.3% in April, the immediate market reaction could cause investors to refrain from pricing in a rate reduction in September and help the USD outperform its rivals. On the other hand, a reading of 0.2%, or lower, could trigger a USD selloff ahead of the weekend and open the door for a leg higher in EUR/USD. 

FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:

“Although EUR/USD edged lower in the first half of the week, the Relative Strength Index (RSI) indicator on the daily chart holds slightly above 50, highlighting a lack of bearish pressure. Following the uptrend that ended on May 16, the pair stabilized above the 1.0780-1.0800 region, where the 50-day, 100-day and 200-day Simple Moving Averages (SMA) are located. If EUR/USD drops below that area and starts using it as resistance, technical sellers could take action. In this scenario, 1.0700 (psychological level, static level) could be seen as the next bearish target before 1.0600 (2024-low set on April 16).”

“On the upside, resistances are located at 1.0900 (static level, psychological level), 1.0950 (static level) and 1.1000 (psychological level, static level). For buyers to remain interested, however, the 1.0780-1.0800 area needs to stay intact as support.”

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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