Breaking: US Core PCE inflation edges lower to 2.8% as expected

Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, declined to 2.4% on a yearly basis in January, the US Bureau of Economic Analysis reported on Thursday. This reading followed the 2.6% increase recorded in December and came in line with the market expectation. On a monthly basis, the PCE Price Index rose 0.3% as forecast.

The Core PCE Price Index, which excludes volatile food and energy prices, rose 2.8% on a yearly basis, matching analysts' estimate. 

Other details of the report showed that Personal Income grew 1% in January, while Personal Spending rose 0.2%.

Follow our live coverage of the PCE inflation data and the market reaction.

Market reaction to PCE inflation data

These figures don't seem to be having a noticeable impact on the US Dollar's performance against its rivals. At the time of press, the US Dollar Index was virtually unchanged on the day at 103.90.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the New Zealand Dollar.

USD   -0.04% 0.10% 0.01% -0.16% -0.44% 0.15% 0.07%
EUR -0.05%   0.01% 0.00% -0.14% -0.48% 0.12% 0.03%
GBP -0.09% -0.08%   -0.08% -0.19% -0.55% 0.07% 0.07%
CAD -0.04% -0.06% 0.06%   -0.15% -0.42% 0.13% 0.03%
AUD 0.16% 0.07% 0.26% 0.12%   -0.33% 0.32% 0.17%
JPY 0.43% 0.39% 0.63% 0.46% 0.32%   0.71% 0.50%
NZD -0.14% -0.11% -0.02% -0.15% -0.26% -0.57%   0.01%
CHF -0.12% -0.13% -0.02% -0.14% -0.28% -0.56% 0.04%  

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 as a preview of the US PCE inflation data at 07:00 GMT.

  • The Core Personal Consumption Expenditures Price Index is set to rise 0.4% MoM and 2.8% YoY in January.
  • Markets see a strong chance of the Federal Reserve keeping the policy rate unchanged in March and May.
  • The slowing progress of PCE inflation towards the 2% target could help the US Dollar stay resilient against its rivals.

The Core Personal Consumption Expenditures (PCE) Price Index, the US Federal Reserve’s (Fed) preferred inflation measure, will be published on Thursday 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 forecast to rise 0.4% on a monthly basis in January, at a stronger pace than the 0.2% increase recorded in December. January Core PCE is also projected to grow at an annual pace of 2.8%, compared to 2.9% in December. The headline PCE inflation is forecast to soften to 2.4% (YoY).

Previewing the PCE inflation report, “The market remains expectant about the final impact on PCE prices following hot January CPI and PPI inflation,” said Oscar Munoz, Chief US Macro Strategist at TD Securities, in a weekly report. “TD expects those robust increases to result in a solid 0.36% m/m jump for the core PCE. The PCE's supercore likely also surged but by an even stronger 0.55%.”

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.

Stronger-than-forecast Consumer Price Index (CPI) and Producer Price Index (PPI) readings in January, combined with the impressive labor market report, revived expectations for the Fed to continue to delay the policy pivot.

The CME FedWatch Tool shows that markets are fully pricing in a no-change in the Fed policy rate in March and see an 85% probability for another hold in May. Although the market positioning suggests that there isn’t much room for additional USD gains in case a strong monthly core PCE reading confirms a Fed policy pause in May, investors could see this data as a sign that could potentially reduce the number of total rate cuts in 2024. Hence, a print above the market expectation could provide a boost to the USD and weigh on EUR/USD.

On the other hand, a softer-than-forecast increase in the monthly core PCE is unlikely to revive expectations for a rate cut in May. Nevertheless, such a reading could help the risk mood improve and allow EUR/USD to edge higher by making it difficult for the USD to hold its ground.

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

“The 200-day Simple Moving Average (SMA) and the 100-day SMA form a pivot level for EUR/USD at 1.0820-1.0830. If the pair fails to stabilize above that level, it could target 1.0700 (Fibonacci 61.8% retracement of the October-December uptrend) on the downside. In case EUR/USD confirms 1.0820-1.0830 as support, 1.0900 (psychological level, static level) could be seen as the next bullish target before 1.0950 (Fibonacci 23.6% retracement)."

US Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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