The EUR/USD pair is currently operating under 1.0550, unable to fully leverage its bounce back from the previous day. This comes amidst a somewhat weak U.S. dollar and a positive market sentiment. The pair’s performance has been influenced by the perceived dovishness of the European Central Bank (ECB). Despite better than expected U.S. growth data, the U.S. dollar remained unaffected.
EUR/USD Daily Chart
The ECB held its policy steady on Thursday, marking the first pause since mid-2022. With inflation slowing down and the Eurozone economy approaching recession, the 4.00% deposit rate is seen as the terminal rate for now. Despite high inflation, the ECB reiterated that rates will remain high for as long as necessary. This led to further weakening of the Euro.
Key ECB Decisions
|Kept policy unchanged||First pause since mid-2022|
|Deposit rate maintained at 4.00%||Seen as terminal rate|
|High inflation acknowledged||Rates to remain high|
The U.S. economy saw an expansion at an annual rate of 4.9% during Q3, beating the 4.2% expectation. However, the Core Personal Consumption Expenditure (PCE) rose by 2.4%, slower than the expected 2.5% and significantly lower than Q2’s 3.7%. Despite this, the U.S. economy remains strong.
U.S. Economic Indicators
|Economic Indicator||Q3 Performance||Expectation|
|Annual GDP growth rate||4.9%||4.2%|
The USD/JPY pair is also experiencing some downward pressure, breaking its three-day streak of gains. The pair had reached its highest level since October 2022, at around the 150.75-150.80 region. Despite this, it remains above the 150.00 mark as traders await the U.S. PCE Price Index.
USD/JPY Daily Chart
|Ended three-day winning streak|
|Reached highest level since Oct 2022|
|Remains above 150.00 mark|
In Japan, Tokyo’s consumer prices excluding fresh food rose by 2.7%, driven by a rise in hotel and accommodation costs and a reduction in electricity subsidies. This increase suggests that businesses are passing costs on to consumers more than expected.
Tokyo Consumer Prices
|Consumer Prices (excluding fresh food)||Rate of Increase|
|Hotel and accommodation costs||43%|
|Consumer prices excluding fresh food and energy||3.8%|
The Bank of Japan (BOJ) is expected to revise its price outlooks for this year and next, given these strong figures. Speculation continues about a change to the BOJ’s yield curve control program, following a further slide in the yen and a rise in long-term yields.
Anticipated Rise in Core PCE Price Index and Potential Impact on the Market
The Core Personal Consumption Expenditures (PCE) Price Index, a favored inflation gauge of the US Federal Reserve (Fed), is scheduled for release by the US Bureau of Economic Analysis (BEA) at 12:30 GMT.
What to Watch from the Upcoming PCE Inflation Report?
The Core PCE Price Index, which excludes the volatile food and energy sectors, is projected to increase by 0.3% month-on-month in September, a more significant rise compared to the 0.1% increase observed in August. The annual Core PCE Price Index is anticipated to ascend by 3.7%, representing a slowdown from August’s 3.9% growth.
The headline PCE Price Index for September is expected to demonstrate a monthly growth of 0.3%, while the yearly PCE inflation is predicted to slightly decrease to 3.4% from August’s 3.5%.
In contrast, the real Gross Domestic Product of the United States grew at an annualized rate of 4.9% in Q3, as reported by the BEA on Thursday. The publication’s details revealed that Q3’s PCE inflation escalated to 2.9% from Q2’s 2.5%, whereas the Core PCE inflation dipped to 2.4% from 3.7% in the previous quarter.
Fed Chairman’s Remarks on Inflation
In early October, Federal Reserve Chairman Jerome Powell addressed the Economic Club of New York, stating that the lower inflation readings over the summer were favorable. However, he remarked that the Consumer Price Index (CPI) figures for September were “somewhat less encouraging.”
Timing of the PCE Inflation Release and Its Potential Effect on EUR/USD
The PCE inflation report is slated for release at 12:30 GMT. Considering that markets have already had a preview of the PCE figures in the Q3 GDP report, the market reaction is expected to be relatively subdued.
According to the Fed’s latest Summary of Projections released in September, policymakers deemed another rate hike appropriate before year-end. However, CME Group’s FedWatch Tool indicates that investors assign a probability of over 70% that the Fed will maintain the interest rate steady in 2023.
It is unlikely that the forthcoming September PCE inflation report will significantly shift market positioning. Up until the Fed’s policy meeting in December, investors will have access to the CPI inflation and employment data for October and November to ascertain whether the Fed’s tightening cycle has concluded.
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