Summary:
- US Core PCE price index falls in August
- USD comes under pressure following the release
- Flat GDP print weighs on CAD
The Fed’s preferred measure of inflation, the core PCE price index, has fallen for the month of August, in a development that could see the central bank a little more reluctant to hike rates. A year on year reading of +1.3% was below the +1.4% expected (which would have been inline with the prior reading) and continues a run of significantly below target inflation amongst readings seen for much of the year.
Both the PCE core and CPI core have been drifting lower this year. Source: XTB Macrobond
The market reaction has been negative for the US dollar and after fairly strong gains seen since last week’s Fed decision the buck could now come back under pressure. At the very least this data point could well increase the chances of no more rate hikes this year as inflation is clearly running well below the 2% target. Fed chair Yellen has previously brushed off falling inflation data as transitory but it is quite clear from this last release that not only is the latest reading well below 2%, it is in fact falling rather than rising.
The EURUSD rose after the data and may look to recoup some of its recent losses. Source: xStation
The EURUSD showed some sign s of a reversal yesterday with price stopping just short of printing a bullish engulfing candlestick. Buoyed by the latest data release the market has now moved firmly back above the 1.18 handle a could be set for a corrective move higher after the recent weakness. 1.1870 is the next swing level on the upside to keep an eye on whist the 1.1720 zone needs to remain in tact to prevent any further declines.
One pair where the US dollar has gained since the release is the USDCAD, with the simultaneous release of Canadian GDP weighing on the Loonie. A reading of 0% month on month was below the expected +0.1% expected and well below the +0.3% seen previously and has caused CAD to drop. The USDCAD cross now sits at a potentially interesting level longer term after Thursday hitting a September high. The market has recovered around 400 pips from the monthly lows but remains in a longer term downtrend. A falling trendline going back to April is now close to being tested and unless price can break above here, then there could be some more downside still to come.
USDCAD has bounced following the data but remains in a longer term downtrend. Source: xStation