Annual inflation in the United States (US), as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, rose to 2.3% in May from 2.2% in April (revised from 2.1%), the US Bureau of Economic Analysis reported on Friday. This reading came in line with the market expectation.
The core PCE Price Index, which excludes volatile food and energy prices, rose 2.7% in the same period, following the 2.6% increase (revised from 2.5%) recorded in April. The PCE Price Index and the core PCE Price Index rose 0.1% and 0.2%, respectively, on a monthly basis.
Other details of the report showed that Personal Income declined by 0.4% on a monthly basis, while the Personal Spending fell by 0.1%.
Market reaction to PCE inflation data
The US Dollar Index edged lower with the immediate reaction to these data and was last seen losing 0.25% on the day at 97.10.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the British Pound.
USD
EUR
GBP
JPY
CAD
AUD
NZD
CHF
USD
-2.34%
-2.47%
-1.57%
-0.80%
-1.72%
-1.94%
-2.45%
EUR
2.34%
-0.15%
0.83%
1.59%
0.60%
0.42%
-0.14%
GBP
2.47%
0.15%
1.01%
1.74%
0.75%
0.57%
0.01%
JPY
1.57%
-0.83%
-1.01%
0.77%
-0.17%
-0.31%
-0.96%
CAD
0.80%
-1.59%
-1.74%
-0.77%
-0.87%
-1.15%
-1.69%
AUD
1.72%
-0.60%
-0.75%
0.17%
0.87%
-0.20%
-0.73%
NZD
1.94%
-0.42%
-0.57%
0.31%
1.15%
0.20%
-0.55%
CHF
2.45%
0.14%
-0.01%
0.96%
1.69%
0.73%
0.55%
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 US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
This section below was published as a preview of the US Personal Consumption Expenditures (PCE) Price Index data for May at 06:00 GMT.
The core Personal Consumption Expenditures Price Index is forecast to rise 0.1% MoM and 2.6% YoY in May.Headline annual PCE inflation is set to increase to 2.3% in the reported month.Markets broadly expect the Federal Reserve to stand pat on interest rates in July.
The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for May on Friday at 12:30 GMT.
This index is closely scrutinized as it is the Federal Reserve’s (Fed) preferred measure of inflation at a moment when traders are looking for hints about when the US central bank will resume interest-rate cuts.
Anticipating the PCE: Insights into the Fed’s key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.1% month-over-month (MoM) in May, at the same pace as seen in April.
Over the last twelve months, the core PCE inflation is set to tick a tad higher to 2.6% in May from 2.5% in April.
Meanwhile, the headline annual PCE inflation is seen rising to 2.3% from 2.1% in the same period.
Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.
During the two-day semiannual congressional testimony earlier in the week, Fed Chairman Jerome Powell noted that he expects policymakers to stay on hold until they have a better handle on the impact tariffs will have on prices.
“We’re just trying to be careful and cautious,” he said.
Powell’s comments dismissed reviving expectations of the Fed lowering interest rates as early as July. These expectations had been prompted by comments from Fed Governors Christopher Waller and Michelle Bowman, who advocated for a July rate reduction a week ago.
Markets currently expect an 18% chance of a July Fed rate cut, while pricing in a 70% probability of a cut in September, according to the CME Group’s FedWatch Tool.
Previewing the PCE inflation report, TD Securities said:
“We look for core PCE prices to stay subdued in May, rising 0.14% MoM after a similar increase in April. Headline PCE inflation should also come in soft at 0.10%. On a year-over-year (YoY) basis, we look for core PCE inflation to rise by one-tenth to 2.6% (headline: 2.3%). Separately, we forecast personal spending to decline 0.2% MoM as normalization after front-loading outlays in Q1 continues.”
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
The US Dollar (USD) hangs close to weekly lows against its major currency rivals amid reduced safe-haven demand, following the Iran-Israel ceasefire announced on Tuesday. Hawkish comments from Fed Chair Powell failed to lift the USD, helping EUR/USD stay close to the highest level so far this year at 1.1718.
The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, Fed Chair Powell already spilled the beans in the June post-policy meeting press conference, stating he expects the annual headline PCE price index at 2.3% and core PCE at 2.6% for the 12 months ending May.
Therefore, an upside surprise in the monthly core print is needed to affirm the hawkish Fed expectations, supporting the USD in an immediate reaction.
Conversely, the Greenback could come under a fresh selling wave if the reading shows 0% or a negative number. In such a case, markets would reassess the probability of a rate reduction in July amid easing worries over sticky inflation.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The 14-day Relative Strength Index (RSI) is prodding the overbought territory in the lead-up to the PCE inflation release as EUR/USD sits at its highest since September 2021. The leading indicator suggests that there is more room for upside before a pullback could seep in.”
“The immediate resistance is spotted at the 1.1800 round number, above which the mid-September 2021 highs around 1.1850 will be tested. The next hurdle will be at the 1.1900 threshold. Looking south, the first line of defense is located at the June 16 high of 1.1616. If that support caves in, sellers will then target the 21-day Simple Moving Average (SMA) at 1.1493. Deeper declines could challenge the 50-day SMA at 1.1385.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
