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Markets Anticipate Further Decline in PCE Inflation, Federal Reserve’s Preferred Indicator

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“Will PCE inflation continue its downward trend? As markets anticipate further declines, the Federal Reserve’s preferred indicator holds the key to understanding the economic landscape ahead.”

The Core Personal Consumption Expenditures (PCE) Price Index, which is the US Federal Reserve’s preferred inflation gauge, is expected to rise 0.3% month-on-month (MoM) and 3.7% year-on-year (YoY) in September. This comes after the Federal Reserve’s Summary of Economic Projections indicated that there could be one more rate hike in 2023. However, the market may overlook the PCE inflation data following Thursday’s GDP report.

The Core PCE Price Index, excluding food and energy, is forecasted to increase by 0.3% in September, a stronger pace than the 0.1% rise in August. On an annual basis, the Core PCE Price Index is expected to rise 3.7%, slightly slower than the 3.9% increase in August. The headline PCE Price Index is anticipated to grow 0.3% MoM in September, with the annual PCE inflation easing to 3.4% from 3.5% in August.

The real Gross Domestic Product (GDP) of the United States grew at an annualized rate of 4.9% in the third quarter, according to the Bureau of Economic Analysis. The PCE inflation rose to 2.9% on a quarterly basis in Q3, while the Core PCE inflation declined to 2.4% from 3.7% in the second quarter.

Federal Reserve Chairman Jerome Powell, speaking before the Economic Club of New York, stated that the lower inflation readings during the summer were favorable, but the September data was “somewhat less encouraging” regarding the Consumer Price Index (CPI) figures.

The PCE inflation report will be released at 12:30 GMT. However, since the PCE figures were already revealed in the third-quarter GDP report, the market reaction is expected to be muted. Investors are currently pricing in a more than 70% probability that the Fed will keep the interest rate steady in 2023, according to the CME Group FedWatch Tool.

The upcoming September PCE inflation report is unlikely to significantly alter market positioning. Investors will have to wait for CPI inflation and employment data for October and November to confirm whether the Fed’s tightening cycle has come to an end.

In terms of technical analysis, EUR/USD remains bearish in the near term, with the Relative Strength Index (RSI) indicator on the daily chart edging lower toward 40. The pair closed below the 20-day Simple Moving Average (SMA) on Thursday after holding above that level for the previous five trading days. Immediate support levels for EUR/USD are at 1.0500, 1.0450 (2023 low), and 1.0400. If the pair stabilizes above 1.0570, buyers could show interest in a technical recovery, with resistance levels at 1.0650 and 1.0700.

Overall, the PCE inflation report is expected to have a limited impact on the market, and investors will be looking to future data releases to determine the direction of the Fed’s monetary policy.

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