Who’s ready to trade one of the most anticipated calendar events this week?
I’m talking about the Fed’s favorite inflation measure, yo!
Here are some points to consider if you plan to trade the Friday report:
Focus on the event:
US Core Personal Consumption Expenditure (PCE) for May 2023
When will it be released:
June 30, 2023 (Friday), 12:30 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
US Core PCE Price Index (MoM): Expectations 0.3% vs. 0.4% prior
US Core PCE Price Index (YoY): 4.5% expected vs. 4.7% prior
Related data since the last data event/release:
Arguments for a higher baseline PCE update
May retail sales: +0.3% m/m (+0.2% m/m forecast; +0.4% m/m previous); Core Retail Sales came in at +0.1%m/m (+0.1%m/m expected; +0.4%m/m)
Factory orders It grew 0.4% month over month in April thanks to strong defense spending, less than the expected 0.8% rise, and the 0.6% increase in March.
non-farm jobs For May: +339K (expected +180K) vs. +294K revised in April; the unemployment rate rose to 3.7% (expected 3.5%, prior 3.4%); Average hourly wage: +0.3% (+0.4% forecast/previous)
Arguments for the low primary PCE rate update
Producer prices for the month of May:-0.3% m/m (0.1% m/m expected; 0.2% m/m previously); Core PPI came in at 0.2% m/m (0.1% m/m expected; 0.2% m/m previously)
CPI for the month of May: 4.0% yoy (4.3% yoy forecast) vs. 4.9% yoy prior; Core CPI fell from 5.5% yoy to 5.3% yoy
ISM Manufacturing PMI In May: 46.9 compared to 47.1 in April; The price index fell 9 points to 44.2 points. The Employment Index rose by 1.2 points, to 51.4
Standard & Poor’s Global Manufacturing in the United States Reading for the month of May: 48.4 compared to 50.2 in April
S&P Global US Services PMI For the month of May: 54.9 vs. 53.6; “The sharp rise in new business since April 2022”; “Fee inflation declined from April but was the second-fastest rate since September 2022 and sharper than the long-term series average.”
New York Federal Reserve Monthly Consumer expectations survey For May: Inflation expectations fell to -0.3 from 4.1% in one year
Previous issues and the impact of the risk environment on the US dollar
May 26, 2023
Overlaying the US dollar against major foreign currencies: Forex for an hour Planned by TV
Event Results/Price Action: Core consumer prices rose 0.4% m/m in April when traders expected the report to maintain the 0.3% gain in March. Same for the annual rate which accelerated to 4.7% instead of maintaining the previous 4.6% increase.
Keep in mind that the Fed generally targets 2% based on a broader gauge but views the fundamental gauge as a better indicator of direction.
The US dollar, which had been in relatively narrow ranges during the US debt ceiling talks, got a boost and made new intraday highs before the event before reversing some gains after the data was released, reflecting a possible “buy the rumour”, “sell the news” behavior pattern.
Risk Environment and Internal Market Behaviors: Volatile stimuli such as global PMIs and inflation updates have usually made headlines for the US debt ceiling.
By Friday, traders were sharply into risk positions after news broke that negotiators from the White House and Republicans had tentatively resolved most of the key issues in the deal, likely ruling out some dollar longs.
April 28, 2023
Overlaying the US dollar against major foreign currencies: Forex for an hour Planned by TV
Event Results/Price Action: As expected, core PCE prices maintained their monthly growth of 0.3% in March. The annual reading came in at 4.6%, slower than February’s upwardly revised reading of 4.7% but higher than the expected reading of 4.5%.
At the time, the quarterly labor cost index — another preferred measure by the Fed — beat estimates of 1.0% at 1.2% in the first quarter of 2023.
The US dollar, which gained pips after the Bank of Japan’s earlier announcement and ahead of the Core Personal Consumption Expenditures (PCE) release, fell overall on speculation that peak inflationary conditions may form, implying a possible peak in the interest rate hike cycle.
The dollar also regained ground after the report in the first hour of release, although the US recession topic is back in focus and short covering/profit taking ahead of the weekend is also likely.
Risk Environment and Internal Market Behaviors: All eyes were on global banking tensions thanks to First Republic Bank’s report on a massive deposit trip and its plans to scale back operations.
Interestingly, the usual safe havens such as the US dollar and the Japanese yen failed to deal with their “safety position” in the first half of the week.
This made it easier for traders to buy “riskier” bets when risk sentiment turned positive and concerns about a Fed rate hike despite increasing recessionary odds dominated the second half of the week.
Price action odds:
Possibilities of feeling risky: The trading week is shaping up to be more like the April 28th print than the May 26th print. This means that traders are not very keen on risk but also do not rush into safe havens like the US dollar and the Japanese yen either.
But it’s still a young week, and calendar events such as the European Central Bank’s Central Bank Forum on Wednesday and China’s PMI releases on Friday may still influence risk overall.
Best guess is that central bankers will remain hawkish on anti-inflationary rhetoric, while Chinese business surveys may continue to show weakness in the resilient manufacturing/services sector. In recent history, this tends to be a risk-off sentiment, but we’ll just watch the “major” market theme by then, and then keep that in mind before the core PCE report.
US dollar scenarios:
Possible base scenario: There are no notable trends of core PCE hitting or missing estimates in the last 10 releases, but based on the data above, it looks like we could see a slowdown in consumer spending in May.
Slower consumer spending could support a less hawkish path for the Federal Reserve, which could ease fears of a difficult US recession and encourage risk taking.
In the event of risk-friendly annual core PCE data, the US dollar could see strong bearish moves against “riskier” assets such as the AUD, NZD and GBP, with conviction higher if the overall risk sentiment turns positive (possible scenario if surprised The Chinese PMI is positive).
Possible alternative scenario: A stronger than expected core PCE figure is likely to convince more traders that the Fed is serious about raising rates at least twice before taking a cold pill this year.
Aside from the Fed’s hawkish bets, the return of fears of a US and/or global recession could push the US dollar higher against its peers.
If markets interpret the higher fundamental PCE reading as rising interest rates and favorable to recession, the US dollar could see gains against currencies such as the Japanese yen, the Swiss franc, the Australian dollar and the euro.
In either of the above scenarios, also keep in mind that the US dollar will have some major potential catalysts ahead of the Core PCE update., most notably speeches by Fed Chair Powell, the latest US GDP data and preliminary weekly updates on jobless claims. If these triggers produce higher volatility and trends during the week, this could affect how traders react to the underlying PCE event.
Given this dynamic, a conservative strategy approach might be to wait until the underlying PCE event is released, and if the actual update deviates sharply from forecast/previous, look for short term/day trade setups such as momentum scalping, breakout of support and resistance, or reversal taking Profits in speculation if signs of exhaustion appear.
Whatever strategy you choose, always remember to practice good risk management and limit maximum risks according to your risk tolerance and circumstances!
