Word through the grapevine is that the Fed is waiting on this preferred inflation measure to gauge if a September hike is likely.
What’s expected from this release?
Here are points you need to consider if you’re planning on trading the U.S. core PCE price index report:
Event in Focus:
U.S. Core Personal Consumption Expenditures (PCE) Price Index for July 2023
When Will it Be Released:
August 31, 2023 (Thursday), 12:30 pm GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
U.S. core PCE price index (m/m): +0.2% forecast vs. +0.2% previous
U.S. core PCE price index (y/y): +4.2% forecast vs. +4.1% previous
Relevant Data Since Last Event/Data Release:
🟢 Arguments for a higher Core PCE rate
S&P Global flash composite PMI survey showed that “Upward pressure on operating expenses from greater wage bills, increased raw material prices and higher fuel costs led to a reacceleration in the pace of input price inflation”
Import prices rose 0.4% m/m in July vs. estimated 0.2% uptick and earlier 0.1% decline
July headline PPI up by 0.3% m/m vs. 0.2% estimate, core PPI up 0.3% m/m vs. 0.2% consensus
July ISM services PMI survey revealed that “The Prices Index was up 2.7 percentage points in July, to 56.8 percent”
July ISM manufacturing PMI survey showed that “The Prices Index registered 42.6 percent, up 0.8 percentage point compared to the June figure of 41.8 percent. “
July average hourly earnings up 0.4% m/m vs. 0.3% forecast, 0.4% previous
🔴 Arguments for a lower Core PCE rate
July CPI rose 0.2% m/m as expected, but annual reading fell short at 3.2% vs. 3.3% estimate. Core CPI also up by 0.2% m/m as expected
Previous Releases and Risk Environment Influence on the U.S. Dollar
July 28, 2023
Event results / Price Action: The U.S. core PCE for June posted a 0.2% month-over-month uptick as expected, slower than the earlier 0.3% increase. Personal income dipped to 0.3% versus the projected 0.4% figure and the earlier 0.5% gain.
Dollar pairs were off to a rangebound start this week, as traders were feeling the jitters ahead of the July FOMC decision. Even though the U.S. currency edged lower upon hearing a hawkish Fed statement, the rally picked up on a strong advanced GDP reading, before giving up some ground on a slightly weak core PCE report.
Risk Environment and Intermarket Behaviors: The market spotlight was on the July FOMC decision, as well as earnings reports from big U.S. companies.
Downbeat PMI readings printed early in the week brought some risk-off vibes in the mix, but the market mood soon improved when China dropped hints about aggressive stimulus efforts soon.
Safe-haven flows later on lifted U.S. bond yields, particularly after the ECB highlighted their deteriorating domestic outlook.
June 30, 2023
Event results / Price Action: Dollar pairs were also off to a lazy start this trading week, as market players held out ahead of Fed head Powell’s speech during the ECB forum and a handful of mid-tier U.S. reports.
As usual, Powell talked of potential interest rate hikes due to persistent labor market strength. These upbeat remarks were underscored by mostly strong U.S. data, including better than expected initial jobless claims figures.
However, some dollar gains were returned when the core PCE price index fell short of estimates, as the reading came in at 3.8% year-over-year versus the projected 3.9% figure and the earlier 4.3% gain.
Risk environment and intermarket behaviors: Traders took cues mostly from Chinese data and central bank rhetoric during the ECB forum this week.
Risk-off flows greeted the markets early on, as the S&P downgrade on Chinese growth forecasts over the weekend soured the mood. However, the tide turned in favor of higher-yielders when the PBOC set the yuan reference rate stronger than expected midweek.
Safe-haven assets regained footing during the ECB forum, though, as most policymakers leaned towards a hawkish stance, keeping global recession fears in play. Treasury yields also got a boost and lifted the U.S. currency towards the end of the week.
Price action probabilities:
Risk sentiment probabilities: Traders appear to be bracing for big directional moves coming from U.S. jobs figures and a handful of global inflation updates lined up this week.
Commodity currencies and risk assets found support from China’s moves to boost its capital markets but the gains were short-lived, suggesting that market players are still on edge.
The U.S. preliminary GDP data might be a major mover ahead of the core PCE release since any significant revisions, particularly for the price index, could strongly impact overall market sentiment as well.
U.S. Dollar scenarios:
Potential Base Scenario: Leading indicators, particularly the PMI reports, appear to be pointing to a stronger core PCE price index for July.
If that’s the case, September tightening hopes could be bolstered, especially since Fed head Powell just recently cited in his Jackson Hole testimony that “restrictive” monetary policy may still be appropriate in order to bring inflation back to target.
An upgrade to the Q2 U.S. GDP preliminary reading and price index may turn Tuesday’s bearish sentiment on USD leading up to the core PCE release, and the Greenback took a big enough beating on Tuesday to lower the odds of strong profit taking selling behavior if we do see a net strong core PCE release.
In this scenario, watch out for bullish USD setups against currencies with mostly dovish central banks, such as EUR and JPY.
Risk-off flows might also come in play because of recession jitters stemming from higher U.S. borrowing costs, so keep an eye out for USD gains versus commodity currencies, too.
Lastly, momentum may be limited in the reaction as traders will likely limit USD biases ahead of Friday’s Non-Farm Payroll report for August.
Potential Alternative Scenario: Another weak core PCE price index would be a big surprise and may lead to results similar to the past two releases wherein the dollar gave up some of its intraweek gains to its counterparts.
Of course this assumes that the dollar is on a steady climb prior to the actual release, possibly coming off an upgrade to the GDP reading or stronger than expected leading jobs indicators.
If the dollar is already on weak footing leading up to Thursday’s inflation report, another wave lower could ensue if the actual core PCE figure falls short (again, a low probability scenario at the moment).
Either way, there could be opportunities to short the dollar intraday versus the commodity currencies (if risk-on flows pick up) or against currencies with more hawkish central banks like GBP.
Just make sure you keep an eye out for quick reversals or profit-taking action since Friday’s NFP report is still on top of most dollar traders’ minds!
