The PCE Price Index Falls, Putting More Pressure on the DXY.
Core PCE prices in the United States, excluding food and energy, rose 0.3% month over month in December 2022, up from 0.2% the previous month and in line with market expectations. Prices for commodities rose by 4.6 percent, while prices for services rose by 5.2 percent. Food costs rose 11.2 percent, while energy prices rose 6.9 percent. The PCE price index grew 4.4 percent year on year, excluding food and energy. This is the smallest growth rate in 14 months. Today's PCE result may put more pressure on the dollar, as markets may interpret it as a warning that the Fed will decrease the pace of rate rises sooner.
The US economy continues to defy expectations, with good first unemployment claims and GDP numbers this week. Is it necessary for the US Federal Reserve to slow the rising cycle? This is the critical question going into next week's meeting. The data continues to point to the possibility of the Fed's promised "soft landing," but there are still reasons to be cautious. Looking at the meat of US statistics, there are indicators of a recession developing, with residential construction declining for the previous six months, industrial production falling for the past three months, and retail sales falling by 1% or more in both November and December.
The overall picture does not appear to be as bright as of late, with lackluster activity expected to hold the Fed in check. Despite the Fed's aggressive stance before the blackout period, markets have altered their forecasts for the Fed Funds Peak Rate in May 2023. Markets now price in a 56% chance that the Fed Funds rate will peak at 5% in May, up from 40.8% a month ago. While the likelihood of a high rate of more than 5% by December 2023 has dropped to 3.1% from 7.8% a month ago. As a result of these adjustments, the dollar index has struggled recently, remaining near multi-month lows.
The market's Reaction
Following the announcement of the data, the dollar index fell marginally, falling below the 102.00 barriers once more. Since hitting the range bottom yesterday at 101.50, the index has attempted to rebound before rallying higher.
We've been stuck in a range for the better part of a week, with neither yesterday's GDP nor today's PCE data inspiring a breakthrough. All attention will be on whether the Fed meeting can spark a breakout. Technically, the longer a pair remains rangebound and consolidating, the more volatile the breakout when it occurs; keep this in mind as we approach next week's risk events.