The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for April on Thursday at 12:30 GMT.
The PCE Price Index is closely watched by market participants because it is the Federal Reserve’s (Fed) preferred measure of inflation and could influence the policy outlook.
Anticipating the PCE: Insights into the Federal Reserve’s key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.3% month-over-month (MoM) in April, matching March’s increase.
In 12 months to April, the core PCE inflation is set to edge higher to 3.3%. Meanwhile, the headline annual PCE inflation is forecast to reach its highest level since May 2023 at 3.8%.
Markets will scrutinize the PCE Price Index data as Fed officials take this inflation gauge into account when deciding on the next policy move. Given the uncertainty created by the ongoing Middle East conflict, investors will assess the details of the PCE inflation report to see whether the US central bank is likely to opt for an interest rate hike before the end of the year.
According to the CME FedWatch Tool, markets are currently pricing in about a 50% probability that the Fed will raise the policy rate by at least 25 basis points by end-2026.
In an interview with Reuters on Wednesday, Minneapolis Fed President Neel Kashkari, who dissented at the April policy meeting and voted against the inclusion of the easing bias in the policy statement, noted that data released since the last meeting have shown that inflationary risks are higher. In the meantime, Fed Governor Christopher Waller, known for his dovish outlook, shifted his tone last week and said that he should remove the easing bias from the statement. Waller further added that he would not hesitate to support an increase in the policy rate if inflation expectations were to become unanchored.
Previewing the PCE inflation report, TD Securities said:
“We expect core and headline PCE prices moderated in April to 0.26% and 0.43% m/m, respectively. Tariff passthrough was moderate in the month, and a slowdown in supercore services offset strength in shelter. Our forecast translates to 3.3% and 3.8% y/y for core and headline, respectively. We also look for nominal and real personal spending to slow down in the month.”
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar (USD) stays resilient against its rivals this week. Still, it struggles to gather strength as investors refrain from taking large positions due to the uncertainty surrounding the conflict between the United States (US) and Iran.
Earlier in the week, the US carried out what it called “self-defense strikes” on Iranian missile sites and mine-laying vessels. In turn, Iran’s Islamic Revolutionary Guard Corps (IRGC) threatened to retaliate, calling the US’s action a violation of the ceasefire. Nevertheless, the truce officially remains in place, while the sides are reportedly working toward finalizing a Memorandum of Understanding (MOU), specifically trying to resolve disputes over language regarding Iran’s nuclear program and sanctions relief.
If the US and Iran reach an agreement to fully open the Strait of Hormuz, crude Oil prices could decline sharply and ease fears over global inflation running out of control. In this scenario, the USD could remain under bearish pressure and help EUR/USD turn north even if the PCE inflation data come in above analysts’ estimates.
In case the US-Iran issue remains unresolved by the time the inflation data is released, it could have a noticeable effect on the USD’s valuation. A stronger-than-forecast print in the monthly core PCE Price Index could boost the USD with the immediate reaction and hurt EUR/USD, as it would suggest that rising energy costs are lifting price pressures in the wider economy. Conversely, a soft print in this data could make it difficult for the USD to gather strength and allow EUR/USD to hold its ground.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The near-term technical outlook for EUR/USD points to a bearish bias but doesn’t show a buildup in momentum. The pair remains in the lower half of the Bollinger Bands on the daily chart and trades below the 20-day, 50-day, 100-day and the 200-day Simple Moving Averages (SMA).”
“On the downside, 1.1560, where the Fibonacci 23.6% retracement level of the late-January to mid-March downtrend meets the lower limit of the Bollinger Bands, aligns as key technical support. A daily close below this level could attract technical sellers and open the door to an extended decline toward 1.1400 (static level).”
“Looking north, a strong resistance area seems to have formed at the 1.1670-1.1700 region (20-day SMA, 100-day SMA, 200-day SMA) ahead of 1.1800 (Fibonacci 61.8% retracement, upper limit of the Bollinger Bands).
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.
