EURUSD gains ahead of US PCE 🗽

💵Markets await for August US PCE reading scheduled at 1:30 PM BST

• EURUSD recovers from losses ahead of PCE
• Core PCE inflation could determine expectations for the November Fed rate cut

Although the next Fed decision is still more than a month away and the name of the new US president will be known before then, today's data may raise or lower market expectations about the size of the next interest rate move. Expectations ahead of today's PCE inflation reading - the Fed's most important measure of inflation in the economy - are fairly mixed. Certainly, a surprise lower reading could weaken the dollar and yields.

• More dangerous for Wall Street indices seems to be a higher-than-forecast PCE reading, which, for one thing, could lead the Fed to be more cautious about the currently aggressive scale of monetary easing and suggest that Powell may have 'made a mistake' by easing policy too much, communicating too aggressive easing cycle. 
• A reading slightly lower, or in line with the forecast, which would suggest that the Fed was 'not wrong' about the dovish pivot, and that inflation will fall, in line with the Federal Reserve's expectations, seems most favorable.
• Beyond inflation itself, the market will turn its attention to Americans' spending and income, where underlying market expectations suggest higher incomes but still lower consumption, while the labor market is sending signs of cooling.  The savings rate of U.S. households is also expected to recover slowly, and the market may view the continued momentum of higher wages and lower spending as signals that a 'soft landing' is likely.

Market expectations

• PCE inflation for August is expected to rise 2.3% y/y, slower than July's 2.5% y/y rate
• Monthly growth is expected to be 0.1% m/m, up from the previous level of 0.2% m/m. The 0.2% m/m level is consistent with achieving the inflation target within the forecast period
• Core PCE inflation, however, is expected to score a rebound to 2.7% y/y, against a previous reading of 2.6% y/y
• Monthly core is expected to rise 0.2% m/m, in line with the previous reading and the Fed's desired inflation dynamics
• Consumer spending is expected to score an increase of 0.3% m/m, with the previous reading of 0.5% m/m in July. Bloomberg Economics, however, points to a sharply lower reading of 0.1% m/m. 
• Earnings, on the other hand, are expected to rise 0.4% m/m, up from the previous reading of 0.3% m/m. BE, however, points to a possible acceleration of 0.5% m/m
• Forecasts suggest that consumers are expected to take the good news, but are holding off on more consumption, given the uncertainty about the future. 
• If today's data show that spending is growing less than before, and earnings are growing more strongly (higher savings rate), it will mean that the Fed has made the right decision to cut interest rates more. 

Core PCE inflation has fallen quite sharply in recent months compared to core CPI inflation. Source: Macrobond, XTB

EURUSD chart (D1, M15)
In the medium term, the main resistance level for EURUSD is the 1.13 level, where the local peaks of July 2023 are located. We can look for short-term support at the level of the 50-session exponential average (yellow line).
Source: xStation5

EURUSD bounced off the lower boundary of the short-term price channel today, after the pair discounted weaker data from the German economy. A lower-than-forecast PCE could push the Eurodollar above 1.12 again.
Source: xStation5