Everyone expects a soft US core PCE inflation print on Friday. The seeds for such an outcome were sown weeks ago following the release of weak consumer and producer price data. So what happens to the US dollar unless we receive a surprise?
By :David Scutt, Market Analyst
- A weak US core PCE inflation reading for May is almost universally expected
- Unless we get a major surprise, incomes and spending data may garner increased attention
- US economic data surprising on the downside at increasing rate
- AUD/USD, EUR/USD, GBP/USD setups in focus
Weak US inflation widely expected
Everyone expects a soft US core PCE inflation print on Friday. The seeds for such an outcome were sown weeks ago following the release of weak consumer and producer price data. While there is always a risk the signal from those alternate reports is wrong, it shouldn’t come as a surprise if the Fed’s preferred inflation measure prints somewhere between 0.1-0.2%.
While such an outcome is near universally expected, what’s not known is how the other parts of the personal consumption expenditures report – incomes and spending data – will fare. These oft overlooked pieces of information are arguably just as important as the inflation read given there’s growing evidence to suggest activity in the United States economy is rolling over.
Citi’s US economic surprise index – which tracks actual outcomes relative to analyst forecasts – continues to sink even further into negative territory, indicating the proportion of negative downside surprises relative to beats continues to mount.
That partly reflects lofty expectations created by the surprisingly resilient performance seen last year, but also undeniable evidence that activity is starting to splutter. We’ve seen that in the final read of Q1 US GDP released on Thursday with another large downward revision to consumer spending, the largest and most important part of the economy.
Even though forward-looking indicators such as PMI surveys and Atlanta Fed GDPNowcast suggest growth is holding up in the second quarter, the message they’re providing looks increasingly at odds with most other incoming data.
Source: Atlanta Fed
Economic activity takes a backseat… for now
Market attention remains understandably on inflation given upside surprises around the world, seeing focus on economic activity take a backseat. But what if the hot readings seen in US earlier in the year were a lead indicator, with the renewed disinflationary trend seen in April and May a sign of what’s to come worldwide?
Who knows, but you can’t help but think the lack of economic focus may resolve itself in a violent repricing of Fed rate cut expectations should we witness a sudden uplift in unemployment as seen in many other cycles?
It’s a reason why risks for the US dollar remain asymmetrically skewed to the downside from my vantage point Downunder. Yes, it’s the least dirty shirt in the closet, but for how much longer? If we were to see a soft core PCE inflation print accompanied by weakness in incomes and spending , is that the kind of environment where you’d want to be hoovering dollars at multi-month highs? Personally, I wouldn’t.
Ahead of the PCE report, we look at the technical setup for AUD/USD, EUR/USD and GBP/USD on a four-hourly timeframe.
AUD/USD rangebound and respectful
The chart tells the story, sitting in a narrow sideways range as part of a larger sideways range.
On the topside, recent probes higher have been capped from .66813 with further minor resistance found at .67045 and .67142. On the downside, AUD/USD finds itself testing uptrend support located at .6644. Below, .66326 has acted as a pivot point as part of the larger range, making that another level of note. Dips towards .65795 have also made for good buying recently.
EUR/USD grinding lower
After the shock of the snap election called by French President Emmanuel Macron earlier this month, EUR/USD has found support at 1.06743 on multiple occasions over recent weeks. However, it remains in a mildly bearish downtrend, coiling up within a narrowing range beneath resistance located around 1.0734.
1.0700 has acted as support and resistance over the past week, making that the first downside level of note. Below 1.06743, 1.0650 is another minor support level. On the topside, 1.07207 has acted as support and resistance in recent sessions, making that an upside target. Above the downtrend, minor resistance is located at 1.07464 and 1.07616.
GBP/USD
GBP/USD has a similar setup to EUR/USD, grinding lower with gains capped below downtrend resistance dating back to June 19. Right now, the pair is testing minor support at 1.2640 with further support located below at 1.2613 and 1.2595.
On the topside, 1.26705 has acted as support and resistance this week, making that the first upside level of note. Above the downtrend, 1.27005 and 1.2740 are other levels to watch.
– Written by David Scutt
Follow David on Twitter @scutty
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