Breaking: US core PCE inflation declines to 2.6% as expected

FXStreet in Market News 12 399098

June 28, 2024 20:51

Inflation in the US, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, edged lower to 2.6% on a yearly basis in May from 2.7% in April, the US Bureau of Economic Analysis reported on Friday. This reading came in line with the market expectation. On a monthly basis, the PCE Price Index was unchanged in May.

The core PCE Price Index, which excludes volatile food and energy prices, rose 2.6% in the same period, down from the 2.8% increase recorded in April. Monthly core PCE Price Index rose 0.1%.

Other details of the report showed that Personal Income grew 0.5% on a monthly basis in May, while Personal Spending rose 0.2%.

Follow our live coverage of the US PCE inflation data and the market reaction.

Market reaction to US PCE inflation data

The US Dollar Index, which tracks the US Dollar’s valuation against a basket of six major currencies, edged lower with the immediate reaction. At the time of press, the index was down 0.1% on the day at 105.80.

US Dollar PRICE Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Australian Dollar.

Â	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD	Â	-0.05%	-0.12%	-0.18%	-0.03%	-0.30%	-0.15%	0.06%
EUR	0.05%	Â	-0.07%	-0.12%	0.06%	-0.25%	-0.10%	0.12%
GBP	0.12%	0.07%	Â	-0.06%	0.08%	-0.19%	-0.04%	0.15%
JPY	0.18%	0.12%	0.06%	Â	0.13%	-0.14%	0.00%	0.23%
CAD	0.03%	-0.06%	-0.08%	-0.13%	Â	-0.28%	-0.13%	0.07%
AUD	0.30%	0.25%	0.19%	0.14%	0.28%	Â	0.15%	0.35%
NZD	0.15%	0.10%	0.04%	-0.01%	0.13%	-0.15%	Â	0.19%
CHF	-0.06%	-0.12%	-0.15%	-0.23%	-0.07%	-0.35%	-0.19%	Â

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

This section below was published as a preview of the US PCE inflation report at 06:00 GMT.

The core Personal Consumption Expenditures Price Index is set to rise 0.1% MoM and 2.6% YoY in May.
Markets see a nearly 40% probability that the Federal Reserve will leave the policy rate unchanged in September.
A hot PCE inflation report could provide a boost to the US Dollar heading into the weekend.

The core Personal Consumption Expenditures (PCE) Price Index, the US Federal ReserveÂ’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 ReserveÂ’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 0.1% on a monthly basis in May, at a softer pace than the 0.2% increase recorded in April. May core PCE is projected to grow at an annual pace of 2.6%, while the headline annual PCE inflation is also forecast to edge lower to 2.6%.

The US Bureau of Labor Statistics (BLS) reported earlier in the month that the Consumer Price Index (CPI) rose 3.3% on a yearly basis in May, while the core CPI increased 3.4% in the same period, down from 3.6% in April.

Previewing the PCE inflation report, Â“CPI and PPI data suggest core PCE inflation lost further momentum in May, with the series advancing 0.13% m/m Â— its lowest monthly gain of the year and following a 0.25% April expansion,Â” TD Securities analysts said. Â“We also look for the headline PCE and the supercore to print 0.0% each in May. Separately, personal spending likely advanced 0.3% m/m, with income rising 0.4%Â”, they added.

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 itÂ’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 price in a 37.7% probability of the Federal Reserve (Fed) leaving the policy rate unchanged in September. This market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event.

In case the monthly core PCE rises 0.2%, or more, in May, 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 0.1%, or lower, could trigger a USD selloff ahead of the weekend and open the door for a leg higher in EUR/USD.Â

Investors, however, could remain reluctant to bet on a steady recovery in the Euro ahead of the first round of French elections on Sunday, even if the PCE inflation figures make it difficult for the USD to find demand. In addition, the data will be released on the last trading day of the second quarter. Hence, quarter-end flows and position adjustments could ramp up market volatility and cause the USD to move irregularly.

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

Â“Despite several recovery attempts seen in the last couple of weeks, the Relative Strength Index (RSI) indicator on the daily chart stays below 50, reflecting buyerÂ’s hesitancy. Furthermore, EUR/USD remains within the descending regression channel coming from early June.Â”

Â“1.0740 (upper limit of the descending channel) aligns as first resistance. Once EUR/USD rises above this level and stabilizes there, 1.0790-1.0800 (100-day Simple Moving Average (SMA), 200-day SMA, psychological level) could be seen as the next resistance before 1.0900. On the downside, 1.0660 (mid-point of the descending channel) aligns as first support before 1.0600 (lower limit of the descending channel).Â”

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the FedÂ’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials Â– the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the FedÂ’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

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