US Core PCE Preview: Extended decline in price pressures could reinforce Federal Reserve rate cut bets

By News Room Last updated Dec 22, 2023

The Core Personal Consumption Expenditures Price Index is set to rise 0.2% MoM and 3.3% YoY in November.
Markets see a strong chance of the Federal Reserve cutting the policy rate as early as March.
The continued cooling of PCE inflation could cause the US Dollar to remain fragile.

The Core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published on Friday by the US Bureau of Economic Analysis (BEA) at 13:30 GMT.

What to expect in the Federal Reserve’s preferred PCE inflation report?

The Core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is seen rising 0.2% on a monthly basis in November to match the October increase, and at an annual pace of 3.3%, down from the 3.5% growth recorded in October.

The headline PCE Price Index is forecast to hold steady on a monthly basis in November, while rising 2.8% on a yearly basis.

In the press conference following the December policy meeting, Fed Chairman Jerome Powell shared the Fed’s expectations of the upcoming PCE data:

“Based on the Consumer Price Index and other data, we estimate that total PCE prices rose 2.6% over the 12 months ending in November; and that, excluding the volatile food and energy categories, core PCE prices rose 3.1%.”

Powell surprised the market by acknowledging that policymakers were thinking and talking about when it will be appropriate to start cutting the interest rate. “We are very focused on not making the mistake of keeping rates too high too long,” he added at the post-meeting press conference. In turn, US Treasury bond yields declined sharply and the US Dollar suffered large losses against its major rivals. Although Fed policymakers have been trying to push back against the market expectations for a policy pivot in the first quarter of next year, markets are still pricing in nearly 80% probability that the Fed will reduce the policy rate by 25 basis points in March, according to the CME Group’s FedWatch Tool.

TD Securities analysts offer a brief preview of the PCE inflation report:

“Core PCE inflation likely notably slowed in November to its softest m/m pace since end 2020 (headline: 0.0% m/m), coming in much below the core CPI’s 0.28% gain. We also look the PCE’s supercore measure to decelerate to 0.1% m/m. Separately, consumer outlays likely picked up in Q4 following a soft October, with spending advancing at a very firm m/m pace in November (+0.5% in real terms).”

When will the PCE inflation report be released, and how could it affect EUR/USD?

The PCE inflation data is slated for release at 13:30 GMT. The monthly Core PCE Price Index gauge is the most-preferred inflation reading by the Fed, as it’s not distorted by base effects and provides a clear view of underlying inflation by excluding volatile items. Investors, therefore, pay close attention to the monthly Core PCE figure.

A bigger-than-expected increase in monthly Core PCE inflation is likely to prompt investors to dial down Fed rate cut expectations for March. However, the Fed forecast, as revealed by Chairman Powell, for the annual Core PCE Price Index increase is below the market consensus, suggesting that there is a small chance of an upside surprise.

On the other hand, a no-change in the monthly Core PCE Price Index, or a negative print, could put additional weight on the USD’s shoulders and ramp up expectations for a March rate cut.

Ahead of the Christmas break, however, the action in financial markets could turn volatile due to shrinking trading volumes, and it might be risky to take a large position based on this data.

FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains:

“EUR/USD remains within an ascending regression trend channel, and the Relative Strength Index (RSI) indicator on the daily chart stays above 50, suggesting that the pair remains bullish.”

“On the upside, 1.1000 (psychological level, static level) aligns as a first resistance. A daily close above that level could open the door for a leg higher toward 1.1100, where the Fibonacci 78.6% retracement of the August-October downtrend and the upper limit of the ascending channel is located. Once this level is confirmed, 1.1275 (July 18 high) could be seen as the next bullish target.”

“The 20-day Simple Moving Average (SMA) forms interim support at 1.0800 (lower limit of the ascending channel) before 1.0760-1.0750 (50-day SMA, 100-day SMA).”

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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