US core PCE inflation set to rise 2.9% YoY in July amid rising bets of Fed rate cut in September

The core Personal Consumption Expenditures Price Index is forecast to rise 0.3% MoM and 2.9% YoY in July.
Headline annual PCE inflation is set to remain unchanged at 2.6%.
Markets broadly expect the Federal Reserve to cut the policy rate by 25 bps in September.

The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for July on Friday at 12:30 GMT.

The PCE index is closely watched by market participants because it is the Federal Reserve’s (Fed) preferred measure of inflation and could influence the policy outlook.

Anticipating the PCE: Insights into the Federal Reserve's key inflation metric

The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.3% month-over-month (MoM) in July, at the same pace as seen in June.

Over the last twelve months, the core PCE inflation is set to tick up to 2.9% from 2.8% in June. Meanwhile, the headline annual PCE inflation is seen holding steady at 2.6% in this period.

Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.

While speaking at the annual Jackson Hole Economic Symposium earlier in the month, Fed Chairman Jerome Powell adopted a relatively dovish tone. Powell acknowledged that downside risks to the labor market were rising and said that it was a reasonable base case for the inflation effects of tariffs to be short-lived. He also shared the Fed’s inflation projections for July, noting that the latest data indicated that the annual PCE inflation and core PCE inflation rose 2.6% and 2.9%, respectively.

Previewing the PCE inflation report, TD Securities said:

“We look for core PCE prices to accelerate in July to 0.30% m/m. Headline will likely moderate to 0.22% due to weak food and energy inflation. Y/Y inflation should be 2.9% and 2.6%, respectively. July saw moderate passthrough of tariffs into goods prices but an acceleration in services. We forecast personal spending to increase 0.5% as core retail sales were strong.”

How will the Personal Consumption Expenditures Price Index affect EUR/USD?

The US Dollar (USD) maintains a neutral stance after weakening against its rivals in the immediate reaction to Powell’s remarks, as markets now nearly fully price in a 25 basis points Fed rate cut at the next meeting in September.

The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, the market reaction could remain short-lived, with Powell’s speech diminishing the surprise factor. Nevertheless, a reading of 0.5% or higher in this data could trigger a USD rally and weigh on EUR/USD, while a print of 0.2% or lower could have the opposite impact on the pair’s action.

Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:

“The Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly above 50 and EUR/USD fluctuates at around the 20-day and the 50-day Simple Moving Averages (SMAs), pointing to a lack of directional momentum.”

“The lower limit of an ascending regression channel coming from January forms an immediate support at 1.1600 (static level, round level) before 1.1500 (100-day SMA) and 1.1400 (static level, round level). Looking north, 1.1800 (static level, round level) could be seen as the next resistance ahead of 1.1950 (mid-point of the ascending channel).”

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.