US core PCE inflation expected to ease, still above Federal Reserve target
- The core Personal Consumption Expenditures Price Index is expected to rise 0.3% MoM and 2.6% YoY in January.
- Markets largely expect the Federal Reserve to hold the policy setting unchanged in March and May.
- Annual PCE inflation is forecast to edge lower to 2.5% from 2.6% in December.
The United States (US) Bureau of Economic Analysis (BEA) is set to release the Personal Consumption Expenditures (PCE) Price Index data for January on Friday at 13:30 GMT. This index is the Federal Reserve’s (Fed) preferred measure of inflation.
Although PCE inflation data is usually seen as a big market mover, it might be difficult to assess its impact on the US Dollar’s (USD) valuation this time. Markets see virtually no chance of a Fed interest rate cut in March, and investors have been more interested in headlines surrounding US President Donald Trump’s policy changes and their potential impact on the economic outlook.
Anticipating the PCE: Insights into the Fed's key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is projected to rise 0.3% on a monthly basis in January, following the 0.2% increase recorded in December. Over the last twelve months, the core PCE inflation is forecast to soften to 2.6% from 2.8%. Meanwhile, the headline annual PCE inflation is seen retreating to 2.5% from 2.6% in the same period.
Following a 25 bps cut in December, lowering the Fed’s policy rate to the 4.25%-4.50% range, the central bank kept interest rates unchanged in the January decision. In the meeting Minutes released on February 19, the central bank removed earlier language suggesting inflation had "made progress" toward its 2% target, instead stating that the pace of price increases "remains elevated" to justify such a pause.
Previewing the PCE inflation report, TD Securities said: “We look for core PCE prices to register a notably weaker advance in January compared to the CPI equivalent's 0.45% m/m increase. Headline PCE inflation should also come in softer at 0.30%. On a y/y basis, core PCE inflation is likely to drop by a notable three tenths to 2.5%—its lowest level since early 2021. Personal spending also likely fell for the first time since March.”
Economic Indicator
Personal Consumption Expenditures - Price Index (YoY)
The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
Read more.Next release: Fri Feb 28, 2025 13:30
Frequency: Monthly
Consensus: 2.5%
Previous: 2.6%
Source: US Bureau of Economic Analysis
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
Market participants will likely react to an unexpected reading in the monthly core PCE Price Index, which is not distorted by base effects. A print of 0.4% or higher in this data could support the US Dollar (USD) with the immediate reaction. On the other hand, a reading below 0.2% could have the opposite effect on the USD’s performance against its major rivals.
Nevertheless, the market reaction is likely to remain short-lived. According to the CME FedWatch Tool, investors see about a 98% probability of the Fed holding the policy settings unchanged in March and price in a 20% chance of a 25 bps rate cut in May. It will likely take several soft PCE inflation readings in succession before market participants see a stronger probability of a rate reduction in May.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The Relative Strength Index (RSI) indicator on the daily chart edges lower but manages to hold above 50, suggesting that EUR/USD loses upward momentum while keeping a slightly bullish bias.”
“On the downside, 1.0390-1.0380 (50-day Simple Moving Average (SMA), Fibonacci 23.6% retracement level of the November-January downtrend) aligns as the first support. In case EUR/USD makes a daily close below this level, technical sellers could take action and open the door for an extended decline toward 1.0300 (static level). Looking north, the first resistance could be spotted at 1.0520 (100-day SMA). Once EUR/USD starts using this level as support, 1.0570 (Fibonacci 50% retracement) and 1.0650 (Fibonacci 61.8% retracement) could be set as next bullish targets.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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