Contents
As anticipation mounts for the release of the (January PCE Report) Core Personal Consumption Expenditures Price Index, markets are poised for potential shifts in Federal Reserve policy and currency valuations. The Core PCE Index, a key measure of inflation favored by the Fed, is expected to provide insights into the trajectory of prices excluding volatile food and energy components. With inflationary pressures on the rise, analysts forecast a notable increase in both monthly and yearly readings, setting the stage for nuanced reactions in financial markets.
Highlights:
- 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.
Expectations for the January PCE Report
Analysts project a robust 0.4% month-on-month (MoM) increase in the Core PCE Price Index for January, outpacing the previous month’s 0.2% growth. Year-on-year (YoY), the index is forecasted to accelerate to 2.8%, compared to December’s 2.9%. Concurrently, headline PCE inflation is expected to soften slightly to 2.4% YoY. These projections signal a continued upward trend in inflationary pressures, albeit with some moderation compared to recent months.
Impact of the January PCE Report
The looming release of the January PCE data has profound implications for financial markets, particularly regarding expectations for Federal Reserve policy. With strong Consumer Price Index (CPI) and Producer Price Index (PPI) readings in January, coupled with a robust labor market report, the prospect of a Fed rate cut in the near term appears diminished. Market sentiment, as reflected in the CME FedWatch Tool, indicates high probabilities of the Fed maintaining its policy rate unchanged in both March and May.
Potential Impact on Currency Markets
Currency markets are closely attuned to the nuances of the PCE inflation report, especially its influence on Fed policy decisions. A stronger-than-expected reading in the monthly core PCE figure could reinforce expectations of a prolonged pause in Fed rate adjustments, providing support for the US Dollar (USD) against its counterparts. Conversely, a softer-than-forecast increase may not necessarily revive rate cut expectations but could buoy risk sentiment and weigh on the USD, potentially boosting the Euro (EUR) against the greenback.
Technical Outlook for EUR/USD
From a technical standpoint, the EUR/USD pair faces pivotal levels around the 200-day Simple Moving Average (SMA) and the 100-day SMA at 1.0820-1.0830. Failure to hold above this range could expose the pair to downside targets near 1.0700, a key Fibonacci retracement level. Conversely, sustained support at 1.0820-1.0830 could propel the pair towards bullish objectives at 1.0900 and 1.0950, respectively.
Conclusion
As investors await the release of the January PCE report, anticipation is rife for its potential impact on Fed policy trajectory and currency markets. A nuanced interpretation of the data, particularly in relation to inflation trends and their implications for monetary policy, will guide market sentiment in the coming weeks. Against a backdrop of heightened volatility and evolving economic dynamics, market participants remain vigilant for cues from the Fed and data releases to navigate currency fluctuations and asset valuations.
