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US Dollar Slips as Core PCE, Fed's Preferred Gauge of Inflation, Misses

US Dollar Slips as Core PCE, Fed's Preferred Gauge of Inflation, Misses

Dylan Jusino,

Talking Points:

- The core PCE price index rose by 1.3% YoY in August, much less than the Fed’s 2% target.

- Sluggish inflation probably will not stop the Fed from raising rates, neither will a lack of labor force participation.

- The US Dollar falls below 93.

- See the DailyFX Economic Calendar for upcoming economic data and for a schedule of live coverage see the DailyFX Webinar Calendar.

See our longer-term forecasts for the US Dollar, Euro, British Pound and more with the DailyFX Trading Guides

This morning’s round of US inflation data is helping keep the US Dollar down on the day. The PCE deflators track overall prices changes in goods and services that are purchased by consumers, making it the Fed’s preferred gauge of inflation. Unfortunately, it has not reached their +2% target once again: the August number was +1.3% versus +1.4% expected (y/y). Personal income was down to +0.2% and spending fell -0.1% (m/m), in line with expectations.

Here’s the data that pushed the US Dollar lower this morning:

- USD Personal Income (AUG): +0.2% expected as expected, from 0.3% previous (revised lower from 0.4%)

- USD Personal Spending (AUG): +0.1% as expected, from +0.3% previous

- USD Real Personal Spending (AUG): -0.1% as expected, from -0.2% previous

- USD PCE Deflator (MoM) (AUG): +0.2% versus 0.3% expected, from 0.1% previous

- USD Personal Consumption Expenditure Deflator (YoY) (AUG): +1.4% versus 1.5% expected, from 1.4% previous

See the DailyFX economic calendar for Friday, September 29, 2017

Wages remain a cause for concern as the Fed continues to suggest that we have reached full employment. According to the New York Fed’s Labor Force Participation, participation fell to the Februrary level of 62.9% in August.

US Dollar Slips as Core PCE, Fed's Preferred Gauge of Inflation, Misses

Source: CME Group’s FedWatch Tool

Despite stagnant wages and relatively low participationg the Fed remains hawkish. According to CME’s FedWatch Tool, the chances of a rate hike in December are at around 78%. The Fed may remain on course to raise interest rates one final time in 2017.

Chart 1: DXY Index 15-minute Chart (September 29, 2017 Intraday)

US Dollar Slips as Core PCE, Fed's Preferred Gauge of Inflation, Misses

Following the release of the inflation data, the US Dollar Index fell slightly below the 93.00 psychological support level. However, the bearish move was not sustained as DXY traded back above 93.00 at the time that this article was written.

--- Written by Dylan Jusino, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.