The US Bureau of Economic Analysis (BEA) is scheduled to release the core Personal Consumption Expenditures (PCE) Price Index, a critical inflation measure preferred by the Federal Reserve, on Friday at 12:30 GMT. This report is expected to play a pivotal role in shaping the next moves for the US Dollar (USD) as the market heads into the Nonfarm Payrolls week.
Core PCE Index Expectations
The core PCE Price Index, which excludes volatile food and energy prices, is anticipated to rise by 0.2% month-over-month in July, maintaining the same pace observed in June. On a year-over-year basis, core PCE is projected to increase by 2.7%, while the headline annual PCE inflation is expected to edge higher to 2.6%.
This inflation gauge is crucial for market participants and the Federal Reserve, as it provides a clearer view of underlying inflation trends by excluding volatile categories that can distort the broader picture. The US Consumer Price Index (CPI) data released earlier indicated a 2.9% annual rise in July, with core CPI increasing by 3.2%, slightly slower than June’s 3.3%.
Analyst Insights and Market Implications
TD Securities analysts previewed the PCE report, predicting that core PCE inflation likely remained subdued, advancing at a soft 0.13% month-over-month pace in July. They noted that shelter price strength, a driver of core CPI inflation, would not impact core PCE as significantly. They also expect headline PCE inflation to register 0.12% month-over-month, with personal spending forecasted to rise robustly at 0.5% month-over-month and 0.4% month-over-month in real terms.
Potential Impact on EUR/USD
As the US Dollar remains near yearly lows against major currencies, the EUR/USD pair has surged to a 13-month high near 1.1200. Market expectations are fully leaning towards a rate cut by the Federal Reserve in September, with a 25 basis point reduction seen as more likely than a 50 basis point cut.
If the PCE data exceeds expectations, it could provide a much-needed boost to the USD by challenging the recent expectations of aggressive Fed rate cuts, potentially leading to a correction in the EUR/USD pair from its one-year highs. Conversely, if the core PCE figures come in weaker than anticipated, it may trigger a fresh sell-off in the USD, driving the EUR/USD pair even higher.
Technical Outlook for EUR/USD
FXStreet Analyst Dhwani Mehta provided a technical perspective on EUR/USD, noting that the uptrend remains intact as long as the support level at 1.1107 holds on a daily closing basis. This level represents the 23.6% Fibonacci Retracement of the August rally from 1.0775 to 1.1202. The 14-day Relative Strength Index (RSI) remains firmly above 50, supporting the bullish potential of the pair.
A daily close above the 13-month high of 1.1202 could pave the way for a test of the psychological level at 1.1250. Conversely, a sustained drop below the 23.6% Fibonacci support at 1.1107 could open the door for a move towards the 38.2% Fibonacci level at 1.1045.
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