The EUR/USD currency pair keeps coming under the pressure, trading below the psychological level of 1.0800 during the opening hours of Friday. Although initially traveling on a promising bounce from the day before, the pair continues battling to hold strength in the face of tightening market conditions. The focus is now on the upcoming release of the United States Bureau of Economic Analysis’ PCE Price Index data for February, scheduled for 12:30 GMT. This is an important report. Importantly, the new information it will include on consumer spending patterns and the level of inflation will be critical in helping the Federal Reserve set its monetary policy.
Fed’s Inflation Target and Market Expectations
To reiterate an important point, the Federal Reserve has consistently targeted a long-run average of 2% inflation in an effort to provide economic stability. The core Personal Consumption Expenditure (core PCE), which excludes food and energy prices, is the Fed’s favorite measure of inflation. With the upcoming release of the PCE Price Index data, we have a unique opportunity. This makes it a particularly timely source of insight into consumption and inflation trends, as we just saw with the CPI report released yesterday.
Economists and financial market analysts were projecting core PCE to remain stubbornly above the Fed’s 2 percent target. They are forecasting it to increase 0.3% M/M and 2.7% Y/Y in February. Any unexpected increase in these figures could heighten concerns about the possibility of higher interest rates, affecting currency markets and investor sentiment.
Currency Movements and Economic Indicators
Consequently, the EUR/USD currency pair has been trading in a tight range as traders look ahead to the key US PCE inflation data always closely watched by the Fed. External factors, such as former President Trump’s tariff policies, have contributed to the pair’s volatility. At the same time, the GBP/USD currency pair is holding up fairly well, finding a bottom just above 1.2950 on Friday’s European session.
The Personal Spending number, the other key part of the release, should be closely watched by investors. As an indication of consumer spending, it is an important indicator of the overall economic strength including inflationary pressures. An even-higher-than-expected spending figure would do even more to shape the Federal Reserve’s thinking towards future interest rate hikes.
Implications for Monetary Policy and Markets
The measure that has been most central to the Federal Reserve’s monetary policy decisions is the core PCE. If the incoming data does reflect a sustained uptick in inflation, we hope the Fed acts appropriately. One, the Fed has the option to raise interest rates to slow an overheating economy. As one of the world’s largest economies, investors around the world are closely watching these developments, as any shifts in rate expectations would roil financial markets worldwide.
The upcoming PCE Price Index data release could not come at a more opportune moment for economic analysis. That comes just a month after the June CPI report. Third, it provides a holistic new cross-sectional look at inflation persistence and inflation expectations at the micro level. This insight is extremely helpful to policymakers and market participants alike.