The United States Bureau of Economic Analysis (BEA) is set to release the highly anticipated Personal Consumption Expenditures (PCE) Price Index data for May this Thursday at 12:30 GMT. As the Federal Reserve’s preferred gauge of inflation, this report is critical for market participants looking to decipher the central bank’s future monetary policy trajectory.
Key Takeaways
- The core PCE Price Index is projected to rise by 0.3% month-over-month (MoM) in May, up from the 0.2% recorded in April.
- Annual core PCE inflation is expected to climb to 3.4%, while headline annual PCE inflation is forecasted to hit a peak of 4%—the highest level since May 2023.
- Market sentiment, reflected by the CME FedWatch Tool, suggests a 65% probability of at least a 25-basis-point (bps) rate hike by the Fed by September.
Market Expectations and Fed Strategy
Investors are scrutinizing the upcoming PCE data to gauge the Fed’s commitment to tightening policy in the second half of the year. Despite a sharp decline in crude oil prices following a framework deal between the US and Iran, persistent strength in the labor market remains a key driver for potential rate hikes. The Federal Reserve’s own Summary of Economic Projections (SEP) from the recent FOMC meeting estimates year-end PCE inflation at 3.6% and core PCE at 3.3%.
Analysts at TD Securities note that while goods prices remain soft, strong services inflation is likely to push the core PCE figure upward. They anticipate a 0.49% MoM headline PCE increase, driven largely by energy costs, while noting that personal spending growth remains modest.
Impact on the US Dollar and EUR/USD
The US Dollar (USD) Index has surged over 2.5% in June, recently piercing the 101.50 level. This momentum is fueled by hawkish Fed projections and robust macroeconomic data. A hotter-than-expected inflation print—particularly a monthly core PCE reading of 0.4% or higher—would likely solidify bets for a September rate hike and put further downward pressure on EUR/USD.
From a technical standpoint, the EUR/USD pair is currently exhibiting oversold conditions, with the Relative Strength Index (RSI) hovering below 30. While a negative surprise in the PCE data could trigger a short-term technical correction for the pair, the underlying trend remains bearish. Key support levels are identified at 1.1300, followed by 1.1220 and 1.1150, while resistance rests at 1.1410/1.1400 and 1.1540.
