US core PCE inflation set to keep pressure on the Federal Reserve to hike interest rates

The United States Bureau of Economic Analysis is set to release the Personal Consumption Expenditures (PCE) Price Index data for July on Wednesday, with a 12:30 GMT start time. The PCE Price Index is a key indicator for financial markets, as it serves as the Federal Reserve's primary tool to gauge inflationary trends and inform monetary policy decisions.

On Wednesday, the PCE release will coincide with the first estimate of Q2 Gross Domestic Product (GDP) and durable goods orders, which could potentially temper the impact of inflationary data on foreign exchange markets. PCE inflation data for July is anticipated to indicate that price pressures remain elevated, significantly above the Federal Reserve's 2% target, driven by high energy prices stemming from the Middle East conflict.

The core PCE Price Index, crucial for monetary policy considerations as it excludes the seasonal impact of food and energy prices, is projected to rise to 0.2% month-over-month (MoM) in July from 0.1% in June. Moreover, the core index remains unchanged at 3.3% year-over-year (YoY), a level that is still below the May 3.4% peak but remains well above the Fed's target.

Market participants will closely scrutinize these figures to glean insights into the Federal Reserve's monetary policy stance. However, the expected reaction to the data is likely to be subdued. The primary focus will likely remain on the upcoming Jackson Hole central bankers meeting on Friday, where Fed Chairman Kevin Warsh is anticipated to offer further insights into the bank's near-term policy strategy, despite his reluctance to provide forward guidance.

Analysts at DBS Bank view the Jackson Hole Symposium as a pivotal assessment for the Fed Chairman, emphasizing the need for Warsh to clarify the Fed's policy approach without forward guidance. This includes how the Fed intends to anchor expectations, the extent of tightening tolerable through long-term yields, and the policy boundary between the Fed and the Treasury.

Clarity on these points is deemed critical for investors in assessing the evolving policy landscape. As of now, expectations of an interest rate hike in September are waning, with futures markets now pricing a 38% probability of a quarter-point rate increase next month, down from 55% a month prior, according to the CME FedWatch Tool.

The Fed's lack of guidance has sparked doubts about Warsh's commitment to inflation-fighting efforts. It will be intriguing to observe whether a robust reading on Wednesday alters this sentiment. The US Dollar (USD) has been grappling to regain lost ground this week, following substantial declines earlier in August, fueled by a combination of weak employment data, the Fed's dovish monetary policy reassessment, and the US Treasury's plan to increase repurchases of long-dated securities.

The US Dollar Index (DXY), which gauges the Greenback's value against a basket of six major currencies, has slipped 0.75% over the month and more than 2.5% below its late July peak. Amid this backdrop, it appears highly improbable that Wednesday's PCE Price Index figures alone will buoy the US Dollar without clear backing from the Federal Reserve.

OCBC analysts suggest that the USD will require "Warsh and other Fed officials pushing back against emerging debasement concerns and reaffirming their commitment to returning inflation to the Fed's 2% target" to garner significant support. As for the EUR/USD pair, FXStreet's Guillermo Alcalá anticipates that the Euro will stabilize near three-month highs, consolidating gains following a 2.5% rally in the current month.

Recent price action suggests a mild correction, with the pair reaching overbought levels across various timeframes. However, the near-term outlook remains bullish, surpassing the significant 200-day Simple Moving Average (SMA). Momentum indicators on the daily chart support this bullish sentiment, with the Relative Strength Index sitting at 70.00, and the Moving Average Convergence Divergence (MACD) positioned above the zero level.

Upside attempts are presently impeded by the 78.2% Fibonacci retracement of the May-June selloff, located at 1.1700. A bullish breakout above this level could expose earlier highs near 1.1790. Conversely, the area between the 200-day SMA at 1.1630 and the prior resistance near 1.1615 is likely to challenge bearish traders. Should the price dip further towards the August 19 low of 1.1570, it may offer some support ahead of the early August lows, just above 1.1500.