US core PCE inflation set to rise 2.9% YoY in July amid rising bets of Fed rate cut in September

• The core Personal Consumption Expenditures Price Index is forecast to rise 0.3% MoM and 2.9% YoY in July.
• Headline annual PCE inflation is set to remain unchanged at 2.6%.
• Markets broadly expect the Federal Reserve to cut the policy rate by 25 bps in September.

The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for July on Friday at 12:30 GMT. 

The PCE index is closely watched by market participants because it is the Federal Reserve's (Fed) preferred measure of inflation and could influence the policy outlook.

Anticipating the PCE: Insights into the Federal Reserve's key inflation metric

The core PCE Price Index, which excludes volatile food and energy prices, is expected to advance 0.3% month-over-month (MoM) in July, at the same pace as seen in June.

Over the last twelve months, the core PCE inflation is set to tick up to 2.9% from 2.8% in June. Meanwhile, the headline annual PCE inflation is seen holding steady at 2.6% in this period.

Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.

While speaking at the annual Jackson Hole Economic Symposium earlier in the month, Fed Chairman Jerome Powell adopted a relatively dovish tone. Powell acknowledged that downside risks to the labor market were rising and said that it was a reasonable base case for the inflation effects of tariffs to be short-lived. He also shared the Fed's inflation projections for July, noting that the latest data indicated that the annual PCE inflation and core PCE inflation rose 2.6% and 2.9%, respectively.

Previewing the PCE inflation report, TD Securities said:

"We look for core PCE prices to accelerate in July to 0.30% m/m. Headline will likely moderate to 0.22% due to weak food and energy inflation. Y/Y inflation should be 2.9% and 2.6%, respectively. July saw moderate passthrough of tariffs into goods prices but an acceleration in services. We forecast personal spending to increase 0.5% as core retail sales were strong."

How will the Personal Consumption Expenditures Price Index affect EUR/USD?

The US Dollar (USD) maintains a neutral stance after weakening against its rivals in the immediate reaction to Powell's remarks, as markets now nearly fully price in a 25 basis points Fed rate cut at the next meeting in September.

The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, the market reaction could remain short-lived, with Powell's speech diminishing the surprise factor. Nevertheless, a reading of 0.5% or higher in this data could trigger a USD rally and weigh on EUR/USD, while a print of 0.2% or lower could have the opposite impact on the pair's action.

Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:

"The Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly above 50 and EUR/USD fluctuates at around the 20-day and the 50-day Simple Moving Averages (SMAs), pointing to a lack of directional momentum."

"The lower limit of an ascending regression channel coming from January forms an immediate support at 1.1600 (static level, round level) before 1.1500 (100-day SMA) and 1.1400 (static level, round level). Looking north, 1.1800 (static level, round level) could be seen as the next resistance ahead of 1.1950 (mid-point of the ascending channel)."