What does jealousy mean for the Fed if Core PCE is more reliable than expected?
If the printout of the Personal Consumer Expenditures Price Index is “as expected,” will that be enough on the downside for the Fed to leave exchange rates at its February meeting?
The US Personal Consumption Expenditures (Core PCE) price index will be the Fed’s preferred inflation measure, which will capture the largest donations for the Fed, without nutrition or energy. On Friday, the US released the December Core PCE. The inflation reading is expected to come in at 4.4% YoY versus a November reading of 4.7% YoY. If you are satisfied with the results, this will be the 4th consecutive monthly drop in inflation. But what did that mean for the Fed?
Expectations have already fallen for the FOMC when it meets next week. After the December meeting, they marched in anticipation of a 50-point house for February. However, after the release of worse than expected economic data throughout January, expectations were lowered on fears of a pullback.
The average hourly wage for December has dropped dramatically. The CPI in December fell for the first time since May 2020. Many thought the housing market was already in decline.
Incidentally, Fed members are sorted in January with comments pointing to a 25-point house on Feb. 1. Using CME Fedwatch, marches have a 100% chance of being home of those with a base of 25 points.
Fedwatch CME Tool
The Bank of Canada raised rates 25 basis points on Wednesday and said it was pausing its rate hike cycle to assess whether monetary policy was tight enough. Canada’s inflation rate is 6.3% year-on-year. Australia just released its RBA-adjusted average CPI, and it was 6.9% year-over-year. What if December’s Core PCE is more reliable than the 4.4% increase in annual growth? Does it make a difference if the FOMC goes up 25 basis points? Could the FOMC surprise the markets and leave the exchange rates? Maybe it can signal a break, like the Bank of Canada. Whether the Core PCE is weaker or stronger, the Fed’s rate hike cycle is almost over.
This may help explain why the US dollar has been weak against the euro. the pair EUR/USD Follow-up joins a trend at home after the release of weak hourly gains on Jan. 6. On the 4-hour chart, the pair EUR/USD bounced off the lower trend line of a bullish channel.
Over the past 2 weeks, the price of the EUR/USD pair has been hovering around the upper trend line and forming an ascending wedge. If the markets continue to believe that the Fed will be dovish (or if the ECB continues to be more hawkish), the price should continue to rise in the rising wedge heading into the FOMC meeting.
Previous highs from April 21, 2022 only go up to 1.0936.
However, if I decide to grab profits ahead of the Fed (remember, the Fed is in a blackout period), then EUR/USD could be pushed lower. Note that it will take care of the fact that the lower prize money of an ascending wedge and will retrace 100%, ie to 1.0766. Subsequently, EUR/USD will retrace to the lower trendline of the channel and horizontal support above 1.0635.
EUR/USD 4 hour chart
The Fed’s preferred inflation measure, the Core PCE, will be released on Friday. The index is expected to rise only 4.4% year-on-year. Note that the Fed is targeting 2% inflation. If the print is “as expected”, will that be enough on the downside for the Fed to leave rates changed at its February meeting? Perhaps, at the very least, this would lead the Fed to signal a pause in March.
But if it’s stronger than expected, as Australia’s CPI was earlier in the day, wait for the Fed to hike 25bps and maintain rate hikes of 25bps “as needed” .
By Joe Perry, CMT, FOREX.com » Official Site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell forex cambio contracts or CFDs. Although the information contained in the document comes from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages which may result in a breach.