PCE Data: Expectations for the Fed’s Preferred Inflation Index

The Personal Consumption Expenditures Index measures the prices that people living in the United States, or those buying on their behalf, pay for goods and services, as defined by the Bureau of Economic Analysis.


This data is scheduled for release today at 17:30 GMT+4 (Dubai Time) and is expected to have declined from 2.6% to 2.4% YoY in January. On a monthly basis, PCE for January is expected to have increased slightly from 0.2% to 0.3%.


However, Core PCE, which excludes volatile prices, is expected to have risen 0.4%, double the 0.2% increase of December.


If the actual figure follows expectations, this would suggest that inflation remains persistent and that a 'higher for longer' interest rate policy from the Fed may be the solution. As analysts suggest, the probability of a delayed easing cycle may place upward pressure on bond yields, leading to a stronger U.S. dollar.


According to the CME Group's FedWatch tool, there is a 51% probability that the Fed won't start cutting rates before June, unlike previous expectations of Fed cuts beginning as early as March.


The Fed has held interest rates at their highest levels in almost three decades to control inflation that has soared since the pandemic, as seen in the figure below.



Figure 1: The Federal Funds Rate and the PCE Annual Change from 1995-2024| Source: TradingView (Feb 2024)



Investors closely watch significant economic indicators like PCE in financial markets as the data can directly impact price movements.


The repricing of Fed cuts from six to three since January has strengthened the DXY by 2.4% over the past two months, but questions about a sustainable upswing have arisen due to the failure to reach 105.00 after CPI and PPI news. Analysts explain that for the trend to continue, either PCE should exceed expectations or Euro inflation, expected on Friday, should fall.


The Dollar Index (DXY), which measures the USD against a basket of major currencies, is currently trading at a steady pace, around 104, showing limited volatility. U.S. Crude Oil and UK Brent futures fell as the expectations of higher for longer rates offset the boost from extending output restrictions by OPEC.


Therefore, investors are advised to closely monitor the economic calendar and make considerate decisions when trading during important news.




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