The United States Bureau of Economic Analysis is poised to release the January data for the Personal Consumption Expenditures (PCE) Price Index on Friday at 13:30 GMT, with significant implications for both economic forecasting and market dynamics. Analysts expect a notable decline in core PCE inflation, projecting it to drop by three-tenths to 2.5%, marking its lowest level since early 2021. Personal spending is also anticipated to have experienced a decline for the first time since March. This data release is critical as the PCE Price Index is the Federal Reserve's preferred measure of inflation, directly influencing monetary policy decisions.
The core PCE Price Index, which excludes volatile food and energy prices, is projected to rise by 0.3% on a monthly basis in January. Similarly, headline PCE inflation is also expected to reflect a softer increase of 0.30%. Over the past year, forecasts suggest that core PCE inflation will soften from 2.8% to 2.6%, while annual PCE inflation is predicted to edge lower from 2.6% in December to 2.5%. Such figures underscore a potential easing in inflationary pressures, contributing to expectations that the Federal Reserve may maintain its current policy stance in the upcoming months.
“We look for core PCE prices to register a notably weaker advance in January compared to the CPI equivalent's 0.45% m/m increase. Headline PCE inflation should also come in softer at 0.30%. On a y/y basis, core PCE inflation is likely to drop by a notable three tenths to 2.5%—its lowest level since early 2021. Personal spending also likely fell for the first time since March.” – TD Securities
Market expectations largely indicate that the Federal Reserve will hold its policy settings unchanged in both March and May. This sentiment is further supported by the CME FedWatch Tool, which shows a roughly 98% probability of the Fed maintaining its current policy stance in March, with a 20% chance of a 25 basis point rate cut in May. These projections come amid ongoing tariff and geopolitical concerns, which could complicate the assessment of the PCE inflation report's impact on the US Dollar's valuation.
A print of 0.4% or higher in this data could bolster the US Dollar (USD), prompting an immediate market reaction. Conversely, a reading below 0.2% might exert downward pressure on the USD's performance against major currencies. The nuanced interpretation of these figures reflects the critical role that inflation measures play in shaping economic policy and currency markets.
“On the downside, 1.0390-1.0380 (50-day Simple Moving Average (SMA), Fibonacci 23.6% retracement level of the November-January downtrend) aligns as the first support. In case EUR/USD makes a daily close below this level, technical sellers could take action and open the door for an extended decline toward 1.0300 (static level). Looking north, the first resistance could be spotted at 1.0520 (100-day SMA). Once EUR/USD starts using this level as support, 1.0570 (Fibonacci 50% retracement) and 1.0650 (Fibonacci 61.8% retracement) could be set as next bullish targets.” – Eren Sengezer, European Session Lead Analyst at FXStreet
Eren Sengezer, European Session Lead Analyst at FXStreet, further adds that the Relative Strength Index (RSI) on the daily chart is trending lower but remains above the midpoint of 50, indicating that while EUR/USD is losing upward momentum, it maintains a slightly bullish bias.
“The Relative Strength Index (RSI) indicator on the daily chart edges lower but manages to hold above 50, suggesting that EUR/USD loses upward momentum while keeping a slightly bullish bias.” – Eren Sengezer, European Session Lead Analyst at FXStreet