Core inflation moves towards the Fed 2% target – should you sell the USD?

Today is the last trading day, so flows in and out of financial markets may result in chaotic price action. The highlight of the trading day was the US Core PCE Price Index m/m – the Fed’s favorite measure of inflation.

It surprised to the downside. Economists expected an increase of 0.2% m/m, but the release showed 0.1% m/m.

To many, this may be nothing. The only thing is that today’s release is quite a big deal and should move markets.

Fed’s Q4 Core PCE projection y/y is too high

The last time the Fed presented its staff projections, the Q4 Core PCE y/y inflation was seen at 3.7%. Today’s data makes it very unlikely that inflation will be so high in Q4.

More precisely, core inflation may only reach that projection if it rises by 0.3% monthly from September to December. Given the trend shown above, such an outcome is improbable.

What does it mean for the USD?

The US dollar had one of its longest winning streaks in recent months. Just have a look at the EUR/USD exchange rate – it is on track to deliver its 11^th consecutive negative week unless it closes today above 1.0650.

But it was not only the EUR, as the dollar strengthened across the board.

However, today’s data should call for caution. The Fed is unlikely to do more, with core inflation coming down more than it was assumed. Hence, the US dollar run may soon be over.

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