The upcoming release of the core Personal Consumption Expenditures (PCE) Price Index is expected to have a significant impact on the US Dollar as it is the Federal Reserve’s preferred measure of inflation. The index is forecasted to rise 0.1% month over month in May, with an annual growth rate of 2.6%. The core PCE, which excludes volatile food and energy prices, is considered a key indicator of inflation for the Fed. A strong PCE inflation report could potentially boost the US Dollar before the weekend.
According to analysts, the Consumer Price Index (CPI) rose by 3.3% on a yearly basis in May, while the core CPI increased by 3.4%. However, PCE inflation lost momentum in May, with a monthly gain of 0.13% following a 0.25% increase in April. The Bureau of Labor Statistics also reported that personal spending likely advanced by 0.3% month over month. The PCE inflation report is set to be released at 12:30 GMT, and investors will closely monitor the monthly core PCE figure for any potential market impact.
Currently, the market indicates a 37.7% probability that the Federal Reserve will leave the policy rate unchanged in September, which poses a two-way risk for the US Dollar. A positive PCE report with a rise of 0.2% or more could deter investors from pricing in a rate cut in September, leading to a stronger USD performance. On the other hand, a weaker-than-expected report of 0.1% or lower could trigger a USD selloff ahead of the weekend and potentially boost the EUR/USD pair.
Despite the potential market impact of the PCE inflation report, investors may remain cautious ahead of the French elections on Sunday. Additionally, quarter-end flows and position adjustments could increase market volatility, causing irregular movements in the USD. Technical analysts suggest that EUR/USD remains within a descending regression channel, with resistance levels at 1.0740 and 1.0790-1.0800 and support levels at 1.0660 and 1.0600.
The Federal Reserve shapes monetary policy in the US by adjusting interest rates to achieve price stability and foster full employment. During periods of high inflation, the Fed raises interest rates, which strengthens the USD. Conversely, when inflation is low or unemployment is high, the Fed may lower interest rates to encourage borrowing, weakening the Greenback. The Fed holds eight policy meetings a year where the Federal Open Market Committee assesses economic conditions and makes monetary policy decisions.
In extreme situations, the Fed may employ Quantitative Easing (QE) to increase the flow of credit in the financial system. This non-standard policy measure was used during the financial crisis in 2008 and involves the Fed printing more Dollars to buy bonds from financial institutions. Quantitative tightening (QT) is the reverse process of QE, where the Fed stops buying bonds and does not reinvest the principal from maturing bonds. QT typically strengthens the US Dollar.
