US Core PCE Inflation Preview: Data-dependent Federal Reserve to scrutinize data

• Core Personal Consumption Expenditures Price Index is set to rise 0.2% MoM and 4.2% YoY in June.
• The Federal Reserve left doors open for more rate hikes but Powell stressed data-dependency.
• US Dollar could see a meaningful recovery on hot PCE inflation data.

The Bureau of Economic Analysis (BEA) will publish the US Federal Reserve’s (Fed) favored inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, on Friday, July 28 at 12:30 GMT.

What to expect in the Federal Reserve’s preferred PCE inflation report?

Personal Consumption Expenditures Price Index, excluding food and energy, is likely to edge higher by 0.2% in June when compared to a 0.3% increase in May. The annual Core PCE Price Index for June is seen rising 4.2% vs. the 4.6% growth reported previously.

Meanwhile, the headline Personal Consumption Expenditures Price Index is expected to drop 0.1% MoM in June after easing to its slowest pace in more than two years in May. The annual PCE figure is expected to rise 3.1%, at a slower pace than May’s increase of 3.8%.

Back in May, the details of the report showed that “consumer spending, adjusted for prices, was little changed after a downwardly revised 0.2% gain in April. From February through May, household spending has essentially stalled after an early-year surge. Spending on merchandise dropped, while outlays for services increased,” according to Bloomberg.

The 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.

Heading into the June PCE release, investors are digesting the US Federal Reserve’s dovish policy outlook at its July meeting. The Fed raised rates by the widely expected 25 basis points (bps) to a 22-year high of 5.25%-5.50% and left doors open for more tightening without committing to the timing of the next lift-off. Powell refrained from providing any forward guidance, emphasizing a ‘data-dependent’ and ‘meeting-by-meeting’ approach.

Commenting on cooling infation, during his post-policy meeting press conference, Powell said the latest report could be a one-off. He stressed that "if we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point.”

Strategists at BBH offered their expectations on the upcoming inflation report, noting that “June core PCE Friday will be important. Headline is expected at 3.0% y/y vs. 3.8% in May, while core is expected at 4.2% y/y vs. 4.6% in May. Of note, the Cleveland Fed’s inflation Nowcast sees the two at 3.0% y/y and 4.2% y/y, respectively and right at consensus.”

“However, its model suggests both PCE measures will accelerate in July to 3.4% y/y and 4.5% y/y, respectively. Personal income and spending will be reported at the same time.  Income is expected at 0.5% m/m while spending is expected at 0.4% m/m. Real personal spending is expected at 0.3% m/m,” the analysts said.

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

The PCE Inflation report is slated for release at 12:30 GMT, on July 28. Following the dovish Fed and strong US economic data, the US Dollar clings to recovery gains, keeping EUR/USD in weekly lows on the 1.0900 level.. Markets continue pricing a probability of 22% and 30% for rate hikes by the Fed in September and November respectively.

The United States economy surprisingly accelerated to a 2.4% annual growth rate in the June quarter vs. 1.8% expected and a 2.0% growth recorded in the first quarter. According to the US Department of Commerce, in seasonally adjusted term Durable Goods Orders jumped 4.7% on a monthly basis to reach $302.5bn. Meanwhile, the latest data published by the US Department of Labor (DOL) showed that Initial Jobless Claims decreased by 7,000 to 221,000 in the week ending July 22. 

The US Dollar could extend its weekly gains in case the monthly Core PCE inflation surpasses the expected 0.2% increase in the reported period. Hot inflation data could strengthen bets for a September rate increase by the Fed. On the other hand, softer-than-expected inflation figures are likely to renew the downside in the Greenback.

FXStreet Analyst Dhwani Mehta offers a brief technical outlook for EUR/USD and explains: “Having breached the critical 21-day Simple Moving Average (SMA) on a daily closing basis on Thursday, Euro sellers are extending control heading toward the US PCE Inflation data release. The 14-day Relative Strength Index (RSI) on the daily chart is sitting below the 50 level, adding credence to the bearish bias.”

Dhwani also highlights the important technical levels for EUR/USD: “On the downside, initial technical support is seen at the confluence of the 50 and 100 DMAs near 1.0910.. A daily close below that level could intensify selling pressure, fuelling a fresh downtrend toward the July 6 low of 1.0833.”

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.