Market participants look ahead to PCE inflation report.

The PCE is the Federal reserve's preferred measure of inflation, and the April number is due for release on Friday. It will influence market participants' views on the central bank's monetary policy path.

According to CME's Fed Watch Tool, there is a 99.1% probability that rates are left unchanged at the Fed's next meeting on 12 June. Chances of a cut increase towards the September meeting, with the current probability for a 25-bps cut at 46.4%, which is down from the 51.6% from a week ago. The PCE print will likely influence the percentage here further.

A key series to keep an eye on the the US real rate, currently priced at 2.13%. It has a strong correlation coefficient with the US dollar (73%), and movement here due to inflation will flow through to other financial instruments because of the time value of money effect.

The core PCE is expected to show some month-on month moderation to 0.2% from last month's 0.3%. However, if inflation still proves to be problematic and surprises to the upside, it is likely to lift yields, supporting the greenback and pressuring the probabilities of rate cuts further.

Trade the News: View our Economic Calendar

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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