• The Core Personal Consumption Expenditures Price Index is set to rise 0.4% MoM and 2.8% YoY in January.
• Markets see a strong chance of the Federal Reserve keeping the policy rate unchanged in March and May.
• The slowing progress of PCE inflation towards the 2% target could help the US Dollar stay resilient against its rivals.

The US Bureau of Economic Analysis (BEA) will release the Core Personal Consumption Expenditures (PCE) Price Index, the preferred inflation indicator used by the US Federal Reserve (Fed), at 13:30 GMT on Thursday.

What to expect in the Federal Reserve’s preferred PCE inflation report?

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. In January, the index is expected to expand by 0.4% every month, which would be a faster rate of gain than the 0.2% increase in December. Additionally, it is anticipated that January Core PCE will expand at an annual rate of 2.8%, down from 2.9% in December. It is expected that the headline PCE inflation will decline to 2.4% (YoY).

Taking a look at the PCE inflation data, According to Oscar Munoz, Chief US Macro Strategist at TD Securities, “the market remains expectant about the final impact on PCE prices following hot January CPI and PPI inflation,” in a weekly report. “TD anticipates that the core PCE will jump by an assertive 0.36% m/m as a result of those substantial gains. Supercore on the PCE most likely increased as well but by an even more outstanding 0.55%.

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

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.

The outstanding labor market report, together with stronger-than-expected readings for the Consumer Price Index (CPI) and Producer Price Index (PPI) in January, reignited anticipation that the Fed would continue to postpone the policy turn.

Markets are entirely pricing in a no-change in the Fed policy rate in March, according to the CME FedWatch Tool, and there is an 85% chance that the rate will remain unchanged in May. Investors may interpret this data as indicating that there may be fewer rate reductions in total in 2024, even while market positioning suggests that there isn’t much room for further USD gains if a high monthly core PCE reading supports a Fed policy pause in May. Therefore, a print that exceeds market expectations may strengthen the USD and weaken the EUR/USD exchange rate.

However, it is unlikely that a lower-than-expected increase in the monthly core PCE would rekindle hopes for a rate cut in May. However, by making it more difficult for the USD to maintain its position, such a reading might enhance the risk mood and enable EUR/USD to move higher.

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

At 1.0820–1.0830, the 200-day and 100-day Simple Moving Averages (SMAs) combine to form the EUR/USD pivot level. The pair may head towards 1.0700, the Fibonacci 61.8% retracement of the October–December upswing, on the downside if it is unable to maintain stability above that level. Before 1.0950 (the Fibonacci 23.6% retracement), 1.0900 (the psychological level, static level) may be viewed as the next bullish objective if EUR/USD confirms 1.0820–1.0830 as support.”

Conclusion

US Core PCE Inflation figures hold sway over a plethora of market mechanisms and investment strategies. The impending release is more than just another data point — it is a pivotal moment that could signify the trajectory of the American economy and the policies that will shape it. Economic analysts, financial advisors, and investors would do well to remain vigilant, agile, and informed in their response to the upcoming market dynamics.

In the wake of the release, monitoring policy statements from the Federal Reserve, assessing the sustainability of economic trends, and recalibrating investment positions should all be on the agenda. By understanding the intricate links between inflation, the Core PCE Index, and market behavior, stakeholders can make more effective and insightful decisions.

Stay tuned, stay informed, and stay ready to leverage the insights that the Core PCE Inflation report promises to deliver. The future of the economy — and your investments — may hinge on how the numbers stack up.