EUR/USD retreated further on Wednesday, around 1.1645. It had peaked above the 1.1628 daily high support before coming off. This shift is in direct response to recent data indicating that the yearly Personal Consumption Expenditures (PCE) Index increased by 2.8%. This figure is consistent with what markets have been expecting and a small improvement over the 2.7% reading from last month.
PCE—the Federal Reserve’s preferred inflation measure—is an important indicator of general inflation, remaining at 0.3% month-over-month. This figure is in line with predictions and is no change from last month. These preliminary figures provide fodder for intense debates about the Federal Reserve’s monetary policy. Already, the central bank is under intense political pressure to raise interest rates.
According to market analysts, there’s an 87% chance of a rate cut at the December 9-10 monetary policy meeting. In a sign of the times, this amusingly counterintuitive in… Read more This cleverness comes from the CME FedWatch Tool. Analysts are predicting a 25 basis point cut. This measure would dramatically shift market conditions and currency exchange rates.
Alongside the PCE data, the Consumer Sentiment Index showed encouraging signs as well. It increased to 53.3, well above the expected 52 and the previous month’s 51. The Expectations Index, which gauges consumers’ outlook for the economy, was at 55, reflecting increasing optimism by consumers.
Taken together, these economic indicators point to a difficult landscape for the U.S. economy. Although inflation is still an issue, the latest consumer sentiment readings point to resilience in consumer spending. That will likely affect the ways in which the Federal Reserve feels compelled to make tradeoffs between fighting inflation and providing the necessary support to future growth.
Foreign exchange markets telegraphed their reaction to these developments with the euro arching to a lower level against the dollar. The dollar’s recent breakout move is giving it a firm technical base for further gains. Traders are already looking ahead to what the Federal Reserve will do next week.
Analysts are looking to catch these pedagogical economic indicators. They’ll need to keep a tight watch on their impacts on currency markets and the broader economy. Inflation metrics and consumer sentiment are inextricably linked. As we near the end of another year, these factors will ultimately shape investor expectations.