Thursday will probably be the most eventful day for the US dollar this week, from a data perspective at least. The core PCE price index, which is the Fed’s preferred inflation measure, as well as personal income and spending figures are all due for release at 1230 GMT. While forecasts point to a robust set of data, there are reasons to be hesitant to trust these projections, which implies the greenback may be at risk from these releases.
Core inflation – which excludes the effects of volatile items such as energy and food – has been treading water in the US for a while now, regardless of which measure one chooses to focus on. Both the core CPI and the core PCE have remained stuck at 1.8% and 1.5% respectively in yearly terms over recent months, exerting little pressure on the Fed to raise interest rates aggressively. In fact, some of the more dovish policymakers have repeatedly called for the Fed to be patient and wait for higher inflation to materialize before lifting interest rates further. Still, the Fed has raised rates in two out of its three latest meetings, on the expectation that inflation will pick up soon and reach its 2% target.Pertaining to the upcoming data set, in February, the core PCE price index is projected to have risen to 1.6% year-on-year, from 1.5% previously. What is critical here, is that economists consider it a close call whether the PCE rate will rise. Out of the 39 institutions submitting their forecasts to the Thomson Reuters system, 22 anticipate the core PCE to rise to 1.6%, while 16 of them see the PCE rate remaining at 1.5%. Only one expects a pick-up to 1.7%. Not to mention that the core CPI rate stayed flat in February. Thus, the risk appears to be a lower-than-expected reading, as opposed to a higher one, like 1.7%. As for personal spending and income, both are anticipated to have risen at the same pace as in the previous month, by 0.2% and 0.4% m/m correspondingly. However, one is a little cautious to trust these forecasts, considering that retail sales fell for a third straight month in February, pointing to a slowdown in spending, and also that average hourly earnings slowed in the month.
While markets see practically no chance for another move at the next policy gathering in May, they do see a 72% probability for a 25bps rate increase at the June meeting, according to the Fed funds futures. Any signs that inflation is accelerating towards 2%, or that economic growth is picking up speed, are likely to make investors more confident that a June hike will indeed take place and by extent, benefit the dollar. Anything that suggests otherwise though, could spell more bad news for the US currency.
Thus, should these data disappoint – for example if the core PCE rate stays unchanged – the dollar could come under renewed selling interest. Dollar/yen may fall back down for a test of the 105.30 area, identified by the March 27 lows, with even steeper declines likely to bring the 104.55 level in focus, which is a 16-month low for the pair.
Conversely, an upside surprise in these figures could amplify expectations for a Fed hike in June and boost the greenback. Dollar/yen could aim for a test of the 106.65 territory, marked by the March 21 highs. If buyers manage to overcome that hurdle, resistance may be found near the 107.30 barrier, defined by the March 12 top.