- The core Personal Consumption Expenditures Price Index is forecast to rise 0.1% MoM and 2.6% YoY in May.
- Headline annual PCE inflation is set to increase to 2.3% in the reported month.
- Markets broadly expect the Federal Reserve to stand pat on interest rates in July.
The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for May on Friday at 12:30 GMT.
This index is closely scrutinized as it is the Federal Reserve’s (Fed) preferred measure of inflation at a moment when traders are looking for hints about when the US central bank will resume interest-rate cuts.
Anticipating the PCE: Insights into the Fed’s key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.1% month-over-month (MoM) in May, at the same pace as seen in April.
Over the last twelve months, the core PCE inflation is set to tick a tad higher to 2.6% in May from 2.5% in April.
Meanwhile, the headline annual PCE inflation is seen rising to 2.3% from 2.1% in the same 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.
During the two-day semiannual congressional testimony earlier in the week, Fed Chairman Jerome Powell noted that he expects policymakers to stay on hold until they have a better handle on the impact tariffs will have on prices.
“We’re just trying to be careful and cautious,” he said.
Powell’s comments dismissed reviving expectations of the Fed lowering interest rates as early as July. These expectations had been prompted by comments from Fed Governors Christopher Waller and Michelle Bowman, who advocated for a July rate reduction a week ago.
Markets currently expect an 18% chance of a July Fed rate cut, while pricing in a 70% probability of a cut in September, according to the CME Group’s FedWatch Tool.
Previewing the PCE inflation report, TD Securities said:
“We look for core PCE prices to stay subdued in May, rising 0.14% MoM after a similar increase in April. Headline PCE inflation should also come in soft at 0.10%. On a year-over-year (YoY) basis, we look for core PCE inflation to rise by one-tenth to 2.6% (headline: 2.3%). Separately, we forecast personal spending to decline 0.2% MoM as normalization after front-loading outlays in Q1 continues.”
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar (USD) hangs close to weekly lows against its major currency rivals amid reduced safe-haven demand, following the Iran-Israel ceasefire announced on Tuesday. Hawkish comments from Fed Chair Powell failed to lift the USD, helping EUR/USD stay close to the highest level so far this year at 1.1718.
The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, Fed Chair Powell already spilled the beans in the June post-policy meeting press conference, stating he expects the annual headline PCE price index at 2.3% and core PCE at 2.6% for the 12 months ending May.
Therefore, an upside surprise in the monthly core print is needed to affirm the hawkish Fed expectations, supporting the USD in an immediate reaction.
Conversely, the Greenback could come under a fresh selling wave if the reading shows 0% or a negative number. In such a case, markets would reassess the probability of a rate reduction in July amid easing worries over sticky inflation.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The 14-day Relative Strength Index (RSI) is prodding the overbought territory in the lead-up to the PCE inflation release as EUR/USD sits at its highest since September 2021. The leading indicator suggests that there is more room for upside before a pullback could seep in.”
“The immediate resistance is spotted at the 1.1800 round number, above which the mid-September 2021 highs around 1.1850 will be tested. The next hurdle will be at the 1.1900 threshold. Looking south, the first line of defense is located at the June 16 high of 1.1616. If that support caves in, sellers will then target the 21-day Simple Moving Average (SMA) at 1.1493. Deeper declines could challenge the 50-day SMA at 1.1385.”
Euro PRICE This week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -2.23% | -2.46% | -1.83% | -0.47% | -1.60% | -1.85% | -2.08% | |
| EUR | 2.23% | -0.26% | 0.46% | 1.81% | 0.59% | 0.40% | 0.11% | |
| GBP | 2.46% | 0.26% | 0.77% | 2.08% | 0.86% | 0.67% | 0.39% | |
| JPY | 1.83% | -0.46% | -0.77% | 1.38% | 0.21% | 0.05% | -0.33% | |
| CAD | 0.47% | -1.81% | -2.08% | -1.38% | -1.09% | -1.39% | -1.66% | |
| AUD | 1.60% | -0.59% | -0.86% | -0.21% | 1.09% | -0.22% | -0.47% | |
| NZD | 1.85% | -0.40% | -0.67% | -0.05% | 1.39% | 0.22% | -0.27% | |
| CHF | 2.08% | -0.11% | -0.39% | 0.33% | 1.66% | 0.47% | 0.27% |
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 Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).
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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