The market’s attention is now glued to the Fed’s preferred inflation gauge – core personal consumption expenditures (PCE). After a week of bond buybacks that pushed long‑dated Treasury yields lower, the dollar is perched on a thin technical support. My sense is that the upcoming data release will be the first real test of whether that support can hold.
Long‑dated yields have been retreating not because the Fed has signaled a policy shift, but largely due to the mechanics of the recent buy‑back programme and a modest easing in oil prices. When yields fall, the dollar’s carry advantage narrows, and investors start to re‑price the risk‑free rate into FX pairs. That dynamic is already visible in the EUR/USD spread, which has narrowed to its tightest level in weeks.
The Fed’s narrative of “disinflation in progress” hinges on core PCE staying below the 2.5 %‑ish range that has guided its recent rate‑pause stance. If the numbers come in softer, the market will likely double‑down on the view that the policy‑rate can stay put for longer, reinforcing the dollar’s recent rally. Conversely, a hotter reading would resurrect the spectre of a more aggressive tightening path, sending yields back up and reviving the dollar’s strength.
What matters for the euro is not just the absolute level of PCE but the delta between U.S. and Euro‑area inflation. The ECB is still on a modest easing trajectory, with its next rate decision expected to be a hold or a small cut. A softer U.S. data set would widen the interest‑rate differential in favour of the euro, giving EUR/USD a clear upside bias.
That said, the euro’s upside is not automatic. The market is also digesting the ECB’s own data – particularly the latest CPI and wage growth figures – which have been showing a slower decline than many had hoped. If the eurozone data disappoints, the pair could remain range‑bound despite a weaker dollar.
Safe‑haven currencies such as the Japanese yen and the Swiss franc are also in the mix. A surprise in the PCE that pushes the dollar lower could trigger a flight to quality, lifting the yen and franc even as the euro gains on rate‑differential grounds. The net effect on EUR/USD will therefore depend on the relative strength of these two forces.
My bottom line is that the dollar’s current rally is more fragile than the headline numbers suggest. I expect the core PCE to come in around expectations, leaving yields on the sidelines and allowing the euro to claw back a few pips. Traders should be prepared for heightened volatility around the data, but the longer‑term bias for EUR/USD remains modestly positive.
