Breaking: US PCE inflation softens to 2.6% from a year ago vs. 2.8% expected


Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose 2.6% on a yearly basis in November, the US Bureau of Economic Analysis reported on Friday. This reading followed the 2.9% increase (revised from 3%) recorded in October and came in below the market expectation of 2.8%.

The Core PCE Price Index, which excludes volatile food and energy prices, rose 3.2% in the same period, down from 3.4% in October. On a monthly basis, the PCE Price Index declined 0.1%, while the Core PCE Price Index increased 0.1%.

Further details of the publication revealed that Personal Income and Personal Spending rose 0.4% and 0.2%, respectively.

Market reaction to US PCE inflation data

These reading don't seem to be having a significant impact on the US Dollar's (USD) performance against its major rivals. At the time of press, the USD Index was down 0.13% on the day at 101.65.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Pound Sterling.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   -0.08% -0.23% -0.02% -0.14% 0.15% -0.09% -0.13%
EUR 0.08%   -0.14% 0.05% -0.09% 0.20% -0.04% -0.04%
GBP 0.27% 0.17%   0.23% 0.09% 0.35% 0.17% 0.15%
CAD 0.06% -0.07% -0.16%   -0.08% 0.23% -0.02% -0.06%
AUD 0.20% 0.08% -0.05% 0.13%   0.26% 0.05% 0.04%
JPY -0.16% -0.23% -0.35% -0.18% -0.28%   -0.24% -0.27%
NZD 0.15% 0.02% -0.06% 0.13% 0.02% 0.30%   0.05%
CHF 0.15% 0.05% -0.05% 0.15% -0.01% 0.24% 0.09%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

 


This section below was published at 07:00 GMT as a preview of the US Personal Consumption Expenditures (PCE) Price Index data.

  • 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).”
 

Economic Indicator

United States 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: 01/26/2024 13:30:00 GMT

Frequency: Monthly

Source: US Bureau of Economic Analysis

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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