US core PCE inflation expected to remain sticky, reinforcing Federal Reserve's cautious stance on rate cuts

• The core Personal Consumption Expenditures Price Index is expected to rise 0.3% MoM and 2.7% YoY in February.
• Markets expect the Federal Reserve to hold the policy setting unchanged in May.
• Annual PCE inflation is forecast to hold steady at 2.5%.

The United States (US) Bureau of Economic Analysis (BEA) is set to release the Personal Consumption Expenditures (PCE) Price Index data for February on Friday at 12:30 GMT. This index is the Federal Reserve's (Fed) preferred measure of inflation.

PCE inflation data is usually seen as a big market mover because it is taken into account by Fed officials when deciding on the next policy move. While speaking in the press conference after the March meeting, Fed Chairman Jerome Powell noted that it would not be the right thing to tighten policy if the inflationary impulse would go away on its own. "We will know in a couple of months if higher goods inflation in the first two months of the year was from tariffs," he added. 

Anticipating the PCE: Insights into the Fed's key inflation metric

The core PCE Price Index, which excludes volatile food and energy prices, is projected to rise 0.3% on a monthly basis in February, matching January's increase. Over the last twelve months, the core PCE inflation is forecast to edge higher to 2.7% from 2.6%. Meanwhile, the headline annual PCE inflation is seen holding steady at 2.5% in this period. 

The Fed decided to leave the interest rate unchanged at 4.25%-4.50% in March. The revised Summary of Economic Projections (SEP), published alongside the policy statement, highlighted that policymakers are projecting a total of 50 bps reduction in the policy rate in 2025. Additionally, the publication showed that the end-2025 PCE inflation and core PCE inflation forecasts are revised higher to 2.7% and 2.8%, respectively, from 2.5% seen in December's SEP.

Previewing the PCE inflation report, TD Securities said: "We look for core PCE prices to remain sticky, rising 0.3% m/m for a second month straight in February. Note that the core CPI rose a softer 0.23% m/m. Headline PCE inflation should come in slightly softer at 0.28%. On a y/y basis, core PCE inflation is likely to rise by a tenth to 2.7%. Personal spending likely partly recovered after contracting for the first time since March 2023."

How will the Personal Consumption Expenditures Price Index affect EUR/USD?

Market participants will likely react to an unexpected reading in the monthly core PCE Price Index, which is not distorted by base effects. A print of 0.4% or higher in this data could support the US Dollar (USD) with an immediate reaction. On the other hand, a reading below 0.2% could have the opposite effect on the USD's performance against its major rivals.

According to the CME FedWatch Tool, markets currently see about a 10% chance of a 25 basis points (bps) interest rate cut in May. The market positioning suggests that the USD doesn't have a lot of room left on the upside, even if PCE inflation data reaffirms the policy held at the next Fed meeting. Hence, a negative print is likely to trigger a bigger market reaction. 

Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:

"The Relative Strength Index (RSI) indicator on the daily chart holds slightly above 50, reflecting a lack of buyer interest. On the downside, 1.0720-1.0700 (200-day Simple Moving Average (SMA), Fibonacci 50% retracement of the October 2024-January 2025 downtrend) aligns as a key support area. In case EUR/USD drops below this region and starts using it as resistance, 1.0600 (Fibonacci 38.2% retracement) and 1.0510 (100-day SMA) could be set as the next bearish targets.

Looking north, resistance levels could be spotted at 1.0820 (Fibonacci 61.8% retracement), 1.0900 (static level, round level) and 1.1000 (Fibonacci 78.6% retracement)."