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The upcoming release of the February US Core PCE Price Index is a highly anticipated event in financial markets. This inflation measure, closely watched by the Federal Reserve (Fed) as its preferred gauge, could significantly impact expectations for future interest rate adjustments.
What to Watch in the February US Core PCE Report
- Expected Increase: The core PCE Price Index, which excludes volatile food and energy prices, is forecast to rise 0.3% on a monthly basis in February. This would be a slightly slower pace compared to the 0.4% increase recorded in January.
- YoY Inflation Steady: The annual core PCE inflation is projected to hold steady at 2.8%, matching the previous reading. The headline PCE inflation, however, might edge up to 2.5% year-over-year.
- Fed Policymakers’ Revised Outlook: The Fed’s latest economic projections indicate an upward revision to their end-of-2024 core PCE forecast, from 2.4% to 2.6%. This suggests a cautious optimism about inflation gradually returning to the central bank’s 2% target.
Implications for Federal Reserve Policy
Federal Reserve Chairman Jerome Powell has emphasized the need for clear signs of inflation receding towards the 2% target before considering a policy rate cut. While acknowledging the impact of seasonal factors on strong January inflation readings, the Fed remains watchful.
Economists predict a continued firm gain in the February core PCE, albeit at a slower pace than January. This could solidify market expectations of a potential Fed rate cut in June, as opposed to the initial projections of May.
The CME FedWatch Tool currently indicates a strong possibility (over 60%) of the Fed lowering the rates by 25 basis points to a range of 5%-5.25% in June. This dovish shift hinges on the upcoming inflation data aligning with expectations or showing further signs of easing price pressures.
Potential Market Reactions to the February US Core PCE
- Stronger-than-expected Core PCE: A higher-than-forecast core PCE reading might not significantly alter the possibility of a June rate cut. However, it could lead to some doubts regarding the projected size of the total rate reductions in 2024, potentially strengthening the US Dollar (USD) in the short term.
- Weaker-than-expected Core PCE: An increase of 0.2% or less in the core PCE could weaken the USD. This scenario might trigger a decline in the 10-year US Treasury yield when the bond market reopens after the Easter holiday weekend.
Technical Outlook for EUR/USD
The 200-day and 100-day Simple Moving Averages (SMAs) create a strong resistance zone around 1.0830. A break above this level could signal a potential rebound for EUR/USD, while a sustained break below could indicate further downside pressure.
The February US Core PCE inflation report will be a critical data point for investors to assess the Fed’s monetary policy trajectory and its potential impact on currency markets like EUR/USD.
