US PCE index will decide whether June rate cut remains likely

The dollar has received a bit of respite in the past couple of trading sessions, and has now recovered around half of its year-to-date losses since falling to four-year lows at the end of January.

The turn of the better in last week’s payrolls report has no doubt helped, but a string of second tier economic reports in the coming days and the release of the Fed’s latest meeting minutes tonight will decide whether the move proves to be anything but temporary.

We will be paying particularly close attention to Friday’s PCE inflation figures, the Fed’s preferred measure of consumer prices, which may give us a better idea as to whether a June cut from the FOMC remains the reasonable base case scenario. Revised fourth quarter GDP figures will equally be worth watching on Friday.

Economists are bracing for a rather sharp downward revision to the Q4 GDP figures (from 4.4% annualised to nearer the 3% mark), which in part would be a reflection of the impact of last year’s prolonged government shutdown. Another solidly above-50 reading in the PMI figures would arguably carry even greater weight for markets given the timeliness of the data.