US data-driven volatility ahead: PCE inflation and GDP data in focus

High-Importance US Data Releases: This week, the US dollar may experience fluctuations due to several significant data releases. Key reports include durable goods and the Michigan consumer sentiment report. However, the main focus will be on Wednesday's final Q1 GDP data and Friday's core PCE report. Additionally, Thursday's first US presidential debate is expected to capture significant attention.

US PCE Inflation Report: The US PCE inflation report, scheduled for Friday, is critical as it could influence the Federal Reserve's decisions on interest rates. This report is important because the Personal Consumption Expenditures (PCE) price index is the Fed's preferred inflation gauge. This year, inflation data has been inconsistent, failing to show a clear trend. For instance, in April, core PCE inflation increased by only 0.2% month-over-month, missing expectations and prompting some to anticipate potential rate cuts.

Inflation and Policy Rates: While there has been notable progress in controlling inflation, further efforts are needed to fully stabilize prices without causing severe economic disruption. Despite recent positive data, the Fed might need to maintain high interest rates if inflation doesn’t decrease to the 2% target. If inflation falls quickly or the job market weakens unexpectedly, a rate cut could be necessary. However, if inflation declines slowly, the Fed may opt to keep interest rates elevated for a longer period.

Equity Market Implications: A softer-than-expected PCE report might lift market spirits, potentially sparking a rally in equities since lower interest rates often boost stock performance. Conversely, a higher-than-expected PCE figure could dampen hopes for early rate cuts and might strengthen the US dollar as traders adjust their expectations for the Fed's policy direction.

Additional Economic Indicators: Friday's report will also be analysed alongside other economic indicators, such as personal income and spending data for May. These insights will help assess overall economic health and consumer demand, shaping expectations for the Fed’s upcoming monetary policy moves.

Final GDP Figures for Q1: Adding more to the mix, the final GDP figures for Q1 will be released on Thursday. This report provides a comprehensive view of economic growth and could influence market sentiment ahead of the PCE data. Expectations are for revised GDP figures to remain steady at 1.3%. A stronger GDP might indicate the economy's resilience despite higher interest rates, complicating the Fed's decisions. Conversely, a weaker GDP could bolster expectations for a dovish Fed, especially if inflation data comes in soft.

Upcoming Presidential Debate: Lastly, the first US presidential debate on Thursday between President Joe Biden and former president Donald Trump is an event to watch. This debate could introduce market volatility, with key issues like Biden’s health and Trump’s tax and tariff policies in focus. Any surprises could shift market sentiment, potentially increasing demand for the USD as a safe-haven currency amid political uncertainty.