Breaking: US Core PCE inflation increases to 4.7% vs. 4.6% anticipated

Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 4.4% on a yearly basis in April from 4.2% in March, the US Bureau of Economic Analysis reported on Friday. This reading came in higher than the market expectation of 3.9%.

The increase in the annual Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, edged higher to 4.7% from 4.6% in the same period, compared to analysts' forecast of 4.6%. On a monthly basis, Core PCE inflation and PCE inflation both rose 0.4%.

Further details of the report revealed that Personal Income increase 0.4% on a monthly basis while Personal Spending rose 0.8%.

Market reaction

With the initial reaction, the US Dollar Index staged a rebound from session lows and was last seen losing 0.1% on the day at 104.10.

Meanwhile, the benchmark 10-year US Treasury bond yield gained traction after these data and climbed to its highest level in over two months above 3.8%.

According to the CME Group FedWatch Tool, markets currently pricing in a more than 50% probability of the US Federal Reserve opting for one more 25 basis points rate increase in June.

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• Core Personal Consumption Expenditures Price Index is expected to rise by 0.3% MoM in April.
• Markets see a strong probability of the Federal Reserve leaving its policy rate unchanged in June.
• US Dollar could gather strength if PCE data confirms sticky core inflation.

The Core Personal Consumption Expenditures (PCE) Price Index data from the United States, the Federal Reserve’s (Fed) preferred inflation measure, will be published by the Bureau of Economic Analysis (BEA) on Friday, May 26 at 12:30 GMT.

What to expect of the Federal Reserve in the next PCE inflation report?

Personal Consumption Expenditures Price Index, excluding food and energy, is expected to rise 0.3% on a monthly basis in April, matching the increase recorded in March.

The annualized Core PCE Price Index for April is forecast to stay unchanged at 4.6%. Moreover, the headline Personal Consumption Expenditures Price Index is expected to rise 0.4% MoM in April, while the annual figure is seen increasing 3.9%, lower than the previous print of 4.2%.

The increase in the monthly figures is mainly expected on the back of potentially robust Personal Income and Personal Spending data, which are both forecast to rise at a health pace of 0.4% in April.

Although the US Federal Reserve (Fed) watches the headline number, officials have said repeatedly that core PCE usually provides a better long-term indicator of where inflation is headed because it strips out prices that can be volatile over shorter time periods.

Commenting on inflation developments earlier in the week, “core measures of inflation have not changed much in recent months,” said St. Louis Federal Reserve President James Bullard. “If inflation is not controlled, the Fed will have to do a lot more, should err on the side of doing more,” Bullard added. On a similar note, Minneapolis Federal Reserve President Neel Kashkari told CNBC that services inflation seemed “pretty darn entrenched”

Previewing the potential impact of PCE inflation data on markets, “if there is a big miss in the data then you would expect the USD to weaken on expectations that the Fed will need to be less aggressive in hiking rates,” said Giles Coghlan, Chief Market Analyst for HYCM Group. “If the data comes in high, and surprises markets, investors will know that keeps the pressure on the Fed to raise interest rates. Typically, if inflation comes in high, you would expect US 10-year yields to rise, gold to fall, the USD to rise and the S&P500 to fall.”

When will be the Personal Consumption Expenditures Price Index report and how could it affect EUR/USD?

The PCE Inflation report is scheduled for release at 12:30 GMT, on May 26. Following the dovish tilt in the policy outlook in May, Federal Reserve (Fed) officials have been pushing back against market expectations for a rate cut later this year. Although the CME Group FedWatch Tool shows that markets are fairly certain that the Fed will leave its policy rate unchanged in June, rising US Treasury bond yields and the renewed US Dollar (USD) strength suggest that markets are re-assessing the possibility of the Fed refraining from lowering the policy rate in 2023. The FedWatch Tool’s probability of a rate cut in September dropped below 20% this week from nearly 50% earlier this month.

Hence, the USD should be able to hold its ground against its major in case monthly PCE inflation comes in near the market expectation of 0.3%. On the other hand, a reading close to 0% should confirm a pause in rate hikes in June and weigh on the USD by feeding into rate cut expectations.

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

“EUR/USD closed below the 100-day Simple Moving Average (SMA) in the last three days and the 20-day SMA is about to make a bearish cross with the 50-day SMA. Additionally, the Relative Strength Index (RSI) indicator on the daily chart stays well below 40, confirming the bearish bias.”

Eren also highlights the important technical levels for EUR/USD: “On the downside, 1.0680 (static level) aligns as first technical support. A daily close below that level could bring in additional sellers and open the door for an extended slide toward the next static support at 1.0550 and 1.0500 (200-day SMA, psychological level).”

“In case EUR/USD rises above 1.0800 (100-day SMA) and stabilizes there, market participants could see that as a bullish development. In that scenario, the next hurdle is located at 1.0900 (20-day SMA, 50-day SMA) ahead of 1.1000 (psychological level).”

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About the Core Personal Consumption Expenditures Price Index

The Core Personal Consumption Expenditures released by the US Bureau of Economic Analysis is an average amount of money that consumers spend in a month. "Core" excludes seasonally volatile products such as food and energy in order to capture an accurate calculation of the expenditure. It is a significant indicator of inflation. A high reading is bullish for the USD, while a low reading is bearish.