PCE Data, Fed Monetary Policy, US Dollar Forecast – TALKING POINTS
- US Dollar may extend gains if key data cools easing hopes
- Equities may get dented as investors yearn for liquidity
- US Core PCE data continues to come in below 2 percent
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The US Dollar may extend gains against its major counterparts and at the expense of equity markets if critical data beats forecasts and undermines Fed easing expectations. The main report investors will be scrupulously monitoring is year-on-year core PCE data, a well-known favorite indicator of the Fed because it provides a clearer picture of underlying inflationary trends.
This is because the index removes energy and food, two volatile inputs that could skew the actual trajectory of inflation. Volatility may also come from personal income, durable goods orders and sentiment data from the University of Michigan. The latter may garner some more attention than usual in light of this week’s dismal consumer confidence report.
US economic data surprises have substantially improved in recent months, so it would not be surprising to see the results of the aforementioned publications fall in-line with this broader uptrend. If so, the US Dollar may rally on the back of dashed hopes of Fed easing which will likely leave equity markets bleeding. Investors’ yearning for liquidity paints a gloomy picture despite cutting rates twice this year already.
Fed Chairman Jerome Powell has consistently reiterated that the central bank is using a data-dependent approach to policy and will adjust rates in accordance to the prevailing economic circumstances. While data has been improving, the US-China trade war continues to undermine business confidence and investment.
Until that issue is resolved, it could make it difficult for the Fed to justify rate hikes or maintain neutrality if it begins to be reflected in lower inflation numbers. The next major meeting will take place October 10-11 in Washington DC and will likely be heavily scrutinized and be a major source of volatility.
Chart of the Day: Will Core Inflation be Able to Return to 2 Percent Before Year-End?
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter
