Traders are eagerly awaiting the next significant economic data release, the upcoming Personal Consumption Expenditure (PCE) Price Index. Released by the Bureau of Economic Analysis (BEA), The PCE Price Index is considered a comprehensive measure because it includes a wide range of expenditures and adjusts for changes in consumer behavior. It is often used by the Federal Reserve to assess inflation trends and make monetary policy decisions.
EUR/USD Struggles Below 1.1200 Ahead of EU Inflation Data
The EUR/USD pair is having a tough time breaking through the 1.1200 level, primarily due to the recent Eurozone data that showed annual HICP inflation softening to 2.2% in August. Investors are now turning their attention towards the US PCE inflation figures, which will play a key role in market sentiment.
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Fed’s Potential Rate Cut
Meanwhile, speculation is rife about the size of the Federal Reserve’s anticipated rate cut in September. Fed Chair Jerome Powell has hinted that the central bank might recalibrate monetary policy soon. Powell emphasized that unless there are unexpected developments, the labor market is unlikely to add significant upward pressure on inflation. The Fed doesn’t want to see further cooling in labor market conditions either.
Understanding Core PCE’s Market Impact
The PCE report is crucial for traders because it is the Federal Reserve’s preferred inflation gauge. Unlike the Consumer Price Index (CPI), the PCE report updates the weights of products more frequently and excludes volatile energy and food prices, offering a clearer picture of underlying price pressures.
Rate Cut Speculations
Fed Chair Jerome Powell has indicated a rate cut in September, primarily due to a weakening labor market and falling inflation. The core PCE data will significantly influence the size of this rate cut. If the core PCE falls rapidly toward the Fed’s 2% target, a larger rate cut of 50 basis points (bps) could be on the cards, which would likely boost gold and stocks while weighing on the US Dollar.
However, if the core PCE comes in stronger than expected, the opposite effect could ensue. This release gains even more importance as it precedes the long Labor Day weekend in the US, with traders scrambling to close positions ahead of the holiday.
USD Index Consolidates Below 101.50
The US Dollar Index (USD) entered a consolidation phase slightly below 101.50 on Friday after two days of gains. Strong macroeconomic data from the US, including a higher-than-expected GDP growth of 3% in Q2 and slightly lower weekly initial jobless claims, provided support for the dollar.
Mixed Reactions from Other Markets
- AUD/USD: Showed no reaction to unchanged retail sales data from Australia, hovering around 0.6800.
- GBP/USD: Dropped to a fresh weekly low below 1.3150 but struggles to recover.
- USD/JPY: Ignored mixed economic data from Japan, trading slightly below 145.00.
Gold Rangebound Ahead of US PCE Price Index Release
Gold prices remain in a narrow range around $2,520 as traders await the US PCE data. Thursday saw an upward revision in the US Q2 GDP, which lessened market expectations of a significant rate cut in September. Despite this, geopolitical tensions between Russia, Ukraine, Israel, and Iran continue to provide support for gold prices.
Key Levels to Watch
The core PCE Price Index is projected to rise by 2.7% YoY in July, slightly up from 2.6% in the previous month. The headline PCE is expected to increase by 2.6%. These figures will be closely scrutinized ahead of next week’s Nonfarm Payrolls release.
Crude Oil Prices Stable Amid Geopolitical Tensions
Crude oil prices are steady around $75.50, following a surge on Thursday. The market is keeping a close eye on political instability in Libya, which could disrupt supply. Additionally, ongoing conflict involving Houthi rebels has further fueled concerns.
USD Index and ECB Commentary
The USD Index remains above 101.00, with traders focusing on the upcoming PCE data. Comments from European Central Bank (ECB) Executive Board member Isabel Schnabel have injected a hawkish tone into the market, strengthening the Euro against the USD. Traders remain cautious ahead of the critical economic data release.
Final Thoughts
The upcoming PCE Price Index is set to be a pivotal moment for various markets. Forex traders, stock market participants, and crypto investors should pay close attention to this data release for insights into future market movements. With many variables at play, staying informed and prepared will be crucial for navigating the volatility ahead.
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