US core PCE inflation set to keep pressure on the Federal Reserve to hike interest rates

The United States (US) Bureau of Economic Analysis (BEA) is expected to publish the Personal Consumption Expenditures (PCE) Price Index data for July on Wednesday, at 12:30 GMT. 

The PCE Price Index is one of the most relevant indicators for financial markets, as it is the Federal Reserve’s (Fed) gauge of choice to assess inflationary trends and, therefore, to decide its monetary policy.

On Wednesday, the US PCE Price Index release will be accompanied by the first estimate of Q2 Gross Domestic Product (GDP) and Durable Goods Orders, which might tame the Forex impact of inflationary data. 

Anticipating the US PCE: Insights into the Federal Reserve's key inflation metric

In general terms, PCE inflation data for July is expected to reveal that price pressures remain high, well above the Fed’s 2% target, buoyed by high energy prices, with the Middle East conflict in a labyrinth, with no end in sight.

The core PCE Price Index – the most relevant figure from a monetary policy perspective, as it strips the seasonal influence of food and energy prices – is seen accelerating to 0.2% month-over-month (MoM) in July, from 0.1% in June, and remaining steady at 3.3% since July last year. These are still levels below May’s 3.4% YoY peak, but also well above the Fed’s target.

Investors are likely to analyse these figures carefully to get some clues about the US central bank’s monetary policy. The reaction to the data, however, is likely to be muted. The main focus will remain on the Jackson Hole central bankers' meeting on Friday, where the Fed Chairman Kevin Warsh is expected to provide further insights on the bank’s near-term policy despite his reluctance to provide forward guidance.

Strategists at DBS Bank see the Jackson Hole Symposium as an important test for the Fed’s Chairman, as, in their opinion, his rejection of forward guidance has “contributed to increased market volatility.”

They argue that Warsh now needs to spell out “how a Fed without forward guidance intends to anchor expectations, how much tightening the Fed is prepared to tolerate through long-term yields, and the policy boundary between the Fed and the Treasury,” with clarity on these points seen as critical for investors trying to assess the evolving policy mix.

As of this writing, bets on an interest rate hike in September are declining. Futures markets are pricing a 38% chance of a quarter-point rate hike next month, down from 55% one month ago, according to data from the CME FedWatch Tool. The central bank’s lack of guidance seems to have triggered doubts about Warsh’s commitment to fight inflation. It will be interesting to see if a strong reading on Wednesday changes this view.

How will the US Personal Consumption Expenditures Price Index affect EUR/USD?

The US Dollar (USD) is struggling to regain lost ground this week, following sharp declines earlier in August, crushed by a mix of downbeat employment figures, the dovish repricing of the Fed’s monetary policy, and a plan by the US Treasury to boost repurchases of long-dated securities. 

The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, is 0.75% down on the month and more than 2.5% below the late July top. Against this background, it seems rather unlikely that Wednesday’s PCE Price Index figures alone can lift the US Dollar without a clear backing from the Fed.

According to OCBC’s Analysts, the USD needs that “Warsh and other Fed officials push back against emerging debasement concerns and reinforce their commitment to returning inflation to the Fed's 2% target” to find any significant support.

Regarding EUR/USD, Guillermo Alcalá, FX Analyst at FXStreet, sees the Euro steady near three-month highs, consolidating gains after a 2.5% rally in the current month.

EUR/USD Daily Chart

Recent price action shows a mild pullback, as the pair has reached overbought levels in most timeframes, but the near-term bias remains constructive, above the key 200-day Simple Moving Average (SMA). Momentum indicators on the daily chart endorse the bullish view, with the Relative Strength Index in the 70.00 area at the time of writing, and the Moving Average Convergence Divergence (MACD) well above the zero level.

Upside attempts have been capped below the 78.2% Fibonacci retracement of the May-June selloff, in the 1.1700 area. A bullish move above here exposes the early-May highs, near 1.1790.

On the downside, the area between the mentioned 200-day SMA, at 1.1630, and the previous resistance area around 1.1615 is likely to challenge bears. Further down, the August 19 low, at 1.1570, might provide some support ahead of the early August lows, just above 1.1500.