Core PCE: Previewing the planet’s new most important economic release

There could also be upside risks to the present week’s core PCE report as higher prices start to become psychologically entrenched…
You can’t get through the front page of any business newspaper without reading about the risks of rising inflation, which trend has only become more dramatic since last week’s hawkish surprise from the Federal Reserve System . With the financial institution essentially telegraphing that it’s looking to announce an idea for tapering asset purchases within the next few months, the market is laser-focused on the Fed’s preferred inflation measure: Core Personal Consumption Expenditures (PCE).

According to the Bureau of Economic Analysis, “the core PCE price level measures the costs paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.” Unlike the more widely-followed consumer price level (CPI) of inflation, core PCE measures price changes for all households and nonprofit institutions serving households, not just urban households, making a broader measure for the country as an entire .

Last month’s core PCE report came in at 0.7% m/m and three .1% y/y, marking the very best year-over-year rate in nearly 30 years. For Friday’s release, traders and economists expect a 0.6% m/m rise, which might raise the y/y rate of inflation to three .4%.

While most economists and therefore the majority of the Federal Reserve System still believe any increases in inflation are going to be transitory, that argument will become more tenuous if hotter-than-expected inflation readings still compile . Notably, this month’s University of Michigan Consumer Sentiment survey showed that buyers expect prices to rise 4.6% over subsequent year and three .0% on the average over subsequent five years, suggesting that there could also be upside risks to the present week’s core PCE report as higher prices start to become psychologically entrenched.

Technical view: EUR/USD

With investors depending on a widening policy divergence between the Fed and therefore the European financial institution , EUR/USD are going to be a pair worth watching closely round the core PCE report release. The world’s most widely-traded currency pair is trading higher on the week after dropping to a two-month low last week, but the recovery looks more sort of a counter-trend correction than a sustainable trend change at now .

As long as prices remain below previous-support-turned-resistance within the 1.20 zone and therefore the 4-hour RSI indicator remains in bearish territory (below 60), readers can view the present pattern as a bearish flag pattern, signaling a possible resumption of the recent downtrend with potential for a move to 1.1850 or 1.1800 within the coming days.