PCE inflation has been below the 3 percent threshold for three consecutive months but is still quite far from the Fed's desired 2 percent inflation target.

Forex market volatility has been relatively low this week as markets continue to weigh the prospects of interest rate cuts from major central banks. The US Dollar Index (DXY) continued to hover in a limited range of 103.50s in the New York session on Friday (26/January).

dxy

The greenback was lifted yesterday by better US gross domestic product (GDP) growth data. However, weaknesses in other economic data, such as Durable Goods Orders and Jobless Claims, hampered its gains. Today's Personal Consumption Expenditure (PCE) report publication was also disappointing.

The data showed that the Core PCE Price Index increased 0.2% (month-over-month) in December 2023, matching the consensus estimate. Meanwhile, on an annualized basis, the Core PCE Price Index weakened from 3.2% to 2.9%, or slightly weaker than the consensus estimate of 3.0%.

The General PCE Price Index was also static at 2.6% annually. This one of the inflation references has been below the 3% threshold for three consecutive months but still quite far from the Fed's desired 2% inflation target.

The data release did little to dampen market expectations of a Fed rate cut. The market is now pricing in a 91% chance of a rate cut starting May - down slightly from the 94% chance observed as per yesterday's US GDP data release. Meanwhile, there is still a 47% chance of a March rate cut scenario.

The current situation does not allow for the greenback to break out of the sideways range that has formed. The market still lacks catalysts for a breakout or breakdown while analysts continue to consider when the Fed will start cutting interest rates.

"The inflation trajectory is improving, giving the Fed leeway to cut rates this year," said Jeffrey Roach, chief economist at LPL Financial. "However, the Fed has further work to do and should not be tempted to declare 'mission accomplished'."