Core US PCE Inflation Expected to Rise, Markets Price September Fed Rate Hike

The US Bureau of Economic Analysis (BEA) will release the May Personal Consumption Expenditures (PCE) Price Index at 12:30 GMT on Thursday.

The PCE index is the Federal Reserve’s preferred inflation gauge and heavily influences policy expectations.

What the PCE Data Means for the Fed

Core PCE, which excludes food and energy, is projected to increase 0.3% month‑over‑month in May after a 0.2% rise in April.

On a year‑over‑year basis, core PCE is forecast to climb to 3.4%, while headline PCE inflation could reach 4%—its highest level since May 2023.

Investors will watch the release closely, as Fed officials use this metric when shaping monetary policy. Despite a recent slide in crude‑oil prices following a framework agreement between the United States and Iran to reopen the Strait of Hormuz, market participants remain convinced that the Fed will need to tighten policy later this year, given strong labour‑market conditions and lingering uncertainty about the pace of disinflation.

The CME FedWatch Tool indicates a roughly 65% probability that the Fed will raise its policy rate by at least 25 basis points in September.

The latest Summary of Economic Projections, released after the June FOMC meeting, shows policymakers expecting PCE inflation to finish the year at 3.6% and core PCE at 3.3%.

TD Securities analyst commented:

“We anticipate strong services‑sector inflation in May, even as goods prices stay weak. Headline PCE should rise 0.49% month‑over‑month driven by energy, while we forecast super‑core inflation at 0.55% after a robust PPI. Personal consumption is expected to grow 0.5%, implying a real‑terms slowdown to 0.0%.”

Implications for EUR/USD

The US Dollar Index has risen more than 2.5% in June, reaching its highest level in over a year above 101.50. Hawkish revisions in the Fed’s projections, cautious comments from Fed Chair Kevin Warsh, and surprisingly strong US macro data have heightened expectations of a rate hike, supporting the dollar’s recent gains.

A softer‑than‑expected core PCE reading may temper the dollar’s advance and give the euro temporary relief, though any impact is likely to be short‑lived. Conversely, a core increase of 0.4% or more could reinforce bets on a September rate hike and press EUR/USD lower.

FXStreet’s European‑session lead analyst Eren Sengezer offers a technical outlook:

“The short‑term bias for EUR/USD remains bearish, but the pair is in oversold territory. The daily RSI is below 30 and the price sits just under the lower Bollinger Band, suggesting a possible technical correction before any further decline.”

Key levels to watch: downside support at 1.1300, followed by 1.1220 and 1.1150; upside resistance at 1.1410‑1.1400, with the Bollinger‑band midpoint around 1.1540 and upper band near 1.1660‑1.1670.

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