The USD/JPY currency pair has ticked above the 155.00 level, up slightly on the day. Market participants are preparing themselves for Friday’s release of the Personal Consumption Expenditures (PCE) inflation figures. The US Bureau of Economic Analysis is about to release this key report. It will help paint a much-needed picture of price trends for consumers across the country. The PCE inflation data is closely monitored by economists and investors alike, as it provides insights into inflationary pressures affecting consumer behavior.
The PCE also captures a broader range of goods and services, including those used by consumers outside the US. This consumption index is a key measure of inflation, tracking the expenditure patterns and price changes that households face. Investors and bond traders are especially interested in this data because it stands to impact the direction that monetary policy takes – particularly by the Federal Reserve. With hopes soaring, this next release promises to offer a telling window into the economic reality.
Understanding the PCE and Its Importance
The Personal Consumption Expenditures (PCE) Price Index is one of the most important measures for tracking inflation in the economy. It’s a comprehensive index that tracks both rising and falling prices over time for a wide range of goods and services from food to housing to health care. As a result, this index has been adored by policymakers, most notably the Federal Reserve. They like it for one simple reason, it goes well beyond other measures like the Consumer Price Index (CPI).
This is because the PCE is released on a monthly basis, providing more up-to-date information about how consumer prices are moving. Every report has a deep dive into month-over-month and year-over-year shifts. The year-over-year (YoY) reading compares the price in the month of reference to the price in the same month, a year before. This has the effect of smoothing out our view of long-term inflation trends.
Investors and analysts watch these reports closely not only for signs of where the economy is today, but for where it could be headed in the coming months. Should the YoY reading come in higher than expected, expectations for future interest rate hikes could ramp up. On the other hand, the lower numbers may be a sign that a more predictable economy.
Delayed Release Raises Eyebrows
Market participants are on edge right now, given the inexplicable $10-day postponement in releasing the PCE Price Index report for September. Historically, these reports have been one of the most eagerly awaited and the most timely monthly releases. This delay has sparked conversations among energy analysts about what it might mean.
Such a postponement would no doubt be seen as an indication of troubles in the data collection or analysis pipeline. Investors fear that these kinds of delays are really just the early signs of more structural problems in consumer spending habits or overall price stability. Consequently, they find themselves continually on guard, hoping for future news that will make things more clear.
This delayed release not only impacts short-term trading strategies, but impacts long-term investment decisions. Market traders usually re-position themselves in anticipation of market over-reaction to bullish or bearish surprises from key economic indicators such as the PCE.
Anticipation Builds Ahead of the Data
As the market looks toward next week’s PCE report, many traders are actively watching the direction USD/JPY currency pair. The recent climb above 155.00 represents some pent up investor optimism that hopefully will pay off with favorable outcomes from the PCE data. A positive outcome would certainly be welcome, supporting confidence in a return for the US economy post the pandemic. This could serve to reinforce the US dollar against the yen even more.
Disappointing results would likely cause stronger volatility in currency markets. Investors know that inflation trends—particularly relative ones—can make or break exchange rates and, by extension, overall economic performance. As a result, everyone is trying to get themselves into the best possible position before that announcement comes.
Market sentiment shifts dramatically and sometimes fickly in reaction to what is expected from certain inflation readings. The novelty effect surrounding this release has the potential to ignite some serious trading activity. As a result, investors scramble to position themselves ahead of potential swings in currency pairs.