US Dollar Slides as Fed’s Favorite Inflation Gauge Comes Below Expectations

Key points of the PCE report:

• Consumer spending in the United States may rise by 0.1% on a monthly basis, a tenth of a percent lower than forecast
• essence PCE It rose 0.3% month-on-month, bringing the annual rate to 4.6% from 4.7%, also lower than estimates.
• U.S. dollar Extends losses after weaker-than-expected spending and core inflation data

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This morning, the US Department of Commerce released income and expense data from last month. According to the agency, personal consumption expenditures, which make up more than two-thirds of the country’s gross domestic product, grew 0.1% month-on-month in May versus a forecast of 0.2%, a sign that the American consumer is losing some remaining steam, but not yet faltering.

Meanwhile, personal income rose 0.4% after rising 0.3% in April, just above expectations. Although no major conclusions should be drawn from a single report, a significant increase in earnings can help households maintain spending in the second half of the year, creating a more constructive backdrop for the economy and preventing a hard landing.

Focusing on price indices, core personal consumption expenditures increased by 0.1% on a monthly basis and 3.8% on a yearly basis. Meanwhile, the core personal consumption expenditures index, the Fed’s preferred inflation indicator that reflects the general direction of prices in the economy, rose 0.3% on a monthly basis, bringing the annual rate to 3.6% from 3.7%, a tenth of a percent lower than forecasts. market.

US personal income and PCE data

source: DailyFX calendar

Softer household spending, combined with weaker inflationary pressures, may give the Fed the cover it needs to adopt a less aggressive stance. While policymakers may still be tempted to raise borrowing costs by 25 basis points in July, given the recent resilience of the US economy, a September hike may be less likely, preventing interest rate expectations from shifting in a more hawkish direction. This situation may limit Treasury yields in the future, creating the right conditions for a decline in the US dollar.

Immediately following this morning’s report, the US dollar, as measured by the DXY, took a bearish turn, falling 0.3%, while bond yields eased across the curve, erasing some of its gains from the previous session. However, if the incoming data continues to cooperate, today’s moves in the FX and fixed income markets may have legs.

US Dollar (DXY) and Production Chart

source: TradingView