Core PCE unlikely to sway Fed next week

The Fed’s favorite measure of inflation, Core PCE, was released earlier today for December. The YoY print fell as expected to 4.4% from 4.7% in November. This was the slowest increase in the inflation print in 14 months! The headline PCE Index fell to 5% YoY vs 5.1% YoY expected and 5.5% YoY in November. This was the lowest level since September 2021. As a result of the “as expected” inflation data, markets are still confident that the FOMC will hike rates by 25bps when it meets on February 1^st. In addition to the inflation data, Personal Income for December was 0.2% MoM vs 0.2% MoM expected and 0.3% MoM in November. Personal Spending fell to -0.2% MoM vs -0.1% MoM expected at -0.1% MoM in November.

As a result of the in-line data, the US Dollar was little changed after the print. As we have discussed in previous articles, EUR/USD bottomed on September 28^th, 2022 at 0.9536 and has been moving higher since. In mid-November, the pair began moving in a tight upward sloping channel, above the 50 Day Moving Average and horizontal resistance at 1.0350. The pair is currently oscillating around the top trendline of the channel and forming an ascending wedge as EUR/USD moves into horizontal resistance from the highs of April 21^st, 2022 near 1.0936.

Source: Tradingview, Stone X

On a 240-minute timeframe, EUR/USD has recently broken below the ascending wedge that the pair has been in since mid-January. The expectation on the break of an ascending wedge is that price will retrace 100% of the wedge. This would target 1.0766. Price has plenty of room to fall to this level, as it acts as the first level of support. Below there, price can fall to horizontal support at 1.0713, then a confluence of support at the 50-Day Moving Average and the bottom trendline of the upward sloping channel near 1.0615/1.0623. (See MA on daily timeframe.) However, if the move below the wedge proves to be a false breakdown, first resistance is at Friday’s high of 1.0900. Above there, price can move up to a confluence of resistance at the April 21^st, 2022, highs and the top trendline of the ascending wedge, near 1.0936/1.0945. If EUR/USD breaks higher, the next level of resistance isn’t until the highs from March 31^st at 1.1185.

Source: Tradingview, Stone X

The December Core PCE print was in-line with expectations. Therefore, markets remain comfortable with pricing in the 98% chance of a 25bps rate hike on Wednesday. However, watch the statement and press conference to see if the Fed is considering a pause or another rate hike of 25bps in March!

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