US Core PCE inflation at 2.8% YoY backs the Fed's case of higher-for-longer

Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, ticked higher to 2.5% on a yearly basis in February, the US Bureau of Economic Analysis reported on Friday. This reading followed the 2.4% increase recorded in January and came in line with the market expectation. On a monthly basis, the PCE Price Index rose 0.3% slightly below the 0.4% expected.

The core PCE Price Index, which excludes volatile food and energy prices, rose 2.8% on a yearly basis, matching analysts' estimate, while the monthly figure posted 0.3% as anticipated. January core PCE Price Index was upwardly revised to 2.9% YoY and 0.5% MoM.

Market reaction to PCE inflation data

A widespread Easter Holiday limited the market's reaction to US inflation figures. The US Dollar came under mild selling pressure with the news, although is set to close March with substantial gains. Despite the limited intraday reaction, the news paints a gloomy picture for those being on upcoming rate cuts in the US. The January upward revision and the February gauges suggest the Federal Reserve has a good case in keeping rates higher for longer. Investors will be looking for employment-related figures next week and will assess it alongside these inflation numbers. In the end, macro data may result in policymakers delaying a cut beyond June or proceeding with just two timid 25 basis points (bps) cuts through 2024. Stock futures ticked lower with the news, reflecting fresh concerns. 

(This story was corrected on March 29 at 12:35 GMT to say that the annual PCE Price Index ticked higher to 2.5% in February, not 25%.)

US Dollar price this month

The table below shows the percentage change of US Dollar (USD) against listed major currencies this month. US Dollar was the weakest against the Australian Dollar.

USD   0.04% -0.08% -0.23% -0.54% 0.76% 1.62% 1.86%
EUR -0.05%   -0.13% -0.30% -0.59% 0.73% 1.57% 1.82%
GBP 0.08% 0.12%   -0.17% -0.46% 0.85% 1.70% 1.94%
CAD 0.24% 0.30% 0.18%   -0.23% 0.97% 1.88% 2.11%
AUD 0.54% 0.58% 0.45% 0.28%   1.30% 2.14% 2.38%
JPY -0.74% -0.74% -0.82% -1.02% -1.14%   0.89% 1.14%
NZD -1.62% -1.61% -1.71% -1.89% -2.04% -0.90%   0.24%
CHF -1.87% -1.86% -1.96% -2.14% -2.37% -1.16% -0.22%  

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 core PCE Price Index data at 06:00 GMT.

  • The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February.
  • Markets see a strong chance of the Federal Reserve lowering the policy rate by 25 basis points in June.
  • The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.

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 12:30 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 0.3% on a monthly basis in February, at a slightly softer pace than the 0.4% increase recorded in January. February core PCE is also projected to grow at an annual pace of 2.8%, matching the previous reading. The headline PCE inflation is forecast to tick up to 2.5% (YoY).

The Federal Reserve’s revised Summary of Economic Projections (SEP), also known as the dot plot– published alongside the policy statement after the March meeting – showed that policymakers expect the annual core PCE inflation to be at 2.6% at the end of 2024, up from the 2.4% forecast seen in the December SEP. 

When commenting on the policy outlook in the post-meeting press conference, Fed Chairman Jerome Powell reiterated that they need greater confidence of inflation moving sustainably down toward the 2% target before they start lowering the policy rate. Powell, however, argued that strong inflation numbers in January were impacted by seasonal effects. 

Previewing the PCE inflation report, “Given still robust increases in the Feb CPI/PPI data, we look for another firm gain for the core PCE — though notably down from January's 0.42% increase and from the core CPI's 0.36% m/m February gain,” said Oscar Munoz, Chief US Macro Strategist at TD Securities, in a weekly report.

When will the PCE inflation report be released, and how could it affect EUR/USD?

The PCE inflation data is slated for release at 12:30 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 and February, combined with data that pointed to tight labor market conditions, caused markets to lean toward a delay in the Fed policy pivot from May to June. Nevertheless, the dot plot showed that policymakers still project the US central bank to cut the policy rate by a total of 75 basis points (bps) in 2024. Hence, markets are pricing in a more than 60% chance that the Fed will lower the policy rate by 25 bps to 5%-5.25% in June, according to the CME FedWatch Tool.

It will be tricky to assess the immediate impact of the PCE data on the US Dollar’s (USD) valuation because trading conditions will be thin on Easter Friday.

Even if the monthly core PCE Price Index rises at a stronger pace than expected, it might not be enough to cause investors to reassess the possibility of another policy hold in June. Nevertheless, it could still provide a boost to the USD, with markets doubting the size of the total reduction in the policy rate. 

On the other hand, an increase of 0.2% or less in the monthly Core PCE Price Index could weigh on the USD. In this scenario, a bearish opening in the 10-year US yield could be seen when the bond market returns to action at the weekly opening next Monday.

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 strong resistance for EUR/USD at 1.0830. As long as this level stays intact as resistance, technical sellers could look to retain control. On the downside, 1.0760 (Fibonacci 78.6% retracement of the October-December uptrend) aligns as next support before 1.0700 (Fibonacci 61.8% retracement). In case EUR/USD manages to reclaim 1.0830, buyers could take action and open the door for an extended rebound toward 1.0900 (psychological level, static level) and 1.0950 (Fibonacci 23.6% retracement).


Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.


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