The US Bureau of Economic Analysis (BEA) is set to release its highly anticipated Personal Consumption Expenditures (PCE) Price Index data for January on Friday at 13:30 GMT. This report, particularly the core PCE index, serves as the Federal Reserve’s (Fed) preferred gauge of inflation, and its release often causes market fluctuations.
Anticipating PCE: Fed’s Inflation Measure in Focus
This time, however, the impact of the PCE report on the US Dollar (USD) may be more nuanced. With markets factoring in minimal chances of a rate cut from the Fed in March, traders have shifted their focus toward US President Donald Trump’s policy changes and their potential economic consequences, leaving the immediate effect of the PCE report less clear.
The core PCE Price Index, excluding volatile food and energy prices, is projected to increase by 0.3% month-over-month in January, up from December’s 0.2% gain. Over the year, the core PCE inflation is expected to ease to 2.6%, down from 2.8%. The overall, or headline, PCE inflation is forecast to decrease to 2.5% from the previous 2.6%.
Following the Federal Reserve’s December decision to cut rates by 25 basis points, placing the policy rate in the 4.25%-4.50% range, the central bank opted to hold rates steady in January. In its February 19 meeting minutes, the Fed removed prior language that suggested inflation had “made progress” toward its 2% target, now stating that inflation “remains elevated,” which justified maintaining the current policy stance.
According to TD Securities, core PCE inflation is expected to show a notably weaker increase for January when compared to the Consumer Price Index (CPI), with a 0.3% monthly increase expected in the headline PCE, and core PCE expected to drop by three-tenths to 2.5%, its lowest level since early 2021. Personal spending is also anticipated to have declined for the first time since March.
Impact of PCE on EUR/USD
Market participants will be closely watching any surprises in the core PCE data, particularly given that this measure is less influenced by base effects. A reading of 0.4% or higher could bolster the US Dollar, while a reading below 0.2% could weigh on the USD against major currency rivals.
Despite potential fluctuations in response to the PCE report, the market reaction is expected to be brief. According to the CME FedWatch Tool, there is a 98% probability of the Fed maintaining its current policy settings in March, with a 20% chance of a 25-basis point rate cut in May. Several soft PCE readings over time would be necessary before traders seriously consider the possibility of a rate cut later this year.
EUR/USD Technical Outlook
Eren Sengezer, European Session Lead Analyst at FXStreet, provided a technical analysis for EUR/USD, noting a slight loss in upward momentum but with the currency pair maintaining a slightly bullish bias. The Relative Strength Index (RSI) on the daily chart has edged lower but remains above 50.
On the downside, the 1.0390-1.0380 range, which includes the 50-day Simple Moving Average (SMA) and the Fibonacci 23.6% retracement level of the November-January downtrend, is identified as the first support. A daily close below this range could trigger additional selling pressure, potentially leading EUR/USD toward the 1.0300 level. To the upside, the first resistance is seen at 1.0520 (100-day SMA), and if EUR/USD holds above this level, the next bullish targets are 1.0570 (Fibonacci 50% retracement) and 1.0650 (Fibonacci 61.8% retracement).
Conclusion
As markets brace for the upcoming PCE report, traders are mindful of the Federal Reserve’s ongoing vigilance on inflation and the potential impact of US policies under President Trump. While the core PCE inflation is expected to soften slightly, it remains above the Fed’s 2% target, reinforcing the central bank’s cautious stance. How the data influences the USD and broader market sentiment remains to be seen, but the PCE report’s impact will likely set the tone for upcoming policy discussions and market movements.