Markets are now awaiting the US Personal Consumption Expenditures (PCE) Price Index for July, which is due to be released on Wednesday.
The PCE is one of the most important inflation measures for the Federal Reserve (Fed) in assessing price pressures and determining the direction of monetary policy.
The data was released along with the preliminary estimate of US second-quarter GDP and Durable Goods Orders, which could potentially influence market reactions.
PCE Expected to Remain High
Core PCE, which excludes food and energy prices, is expected to rise 0.2% month-on-month (MoM) in July compared to 0.1% in June.
Year-on-year (YoY), core PCE is expected to remain at 3.3%, still well above the Fed's 2% inflation target.
A higher-than-expected reading could reinforce concerns that inflationary pressures have not abated.
Conversely, a lower reading could raise expectations for looser monetary policy.
Markets Await Warsh
While the PCE data is important, the main focus of the market is still on Fed Chairman Kevin Warsh's speech in Jackson Hole on Friday.
Investors are looking for a clearer indication of the direction of US interest rates after previous Fed communications have yet to provide solid guidance.
Currently, futures markets are showing a probability of around 38% for a 0.25 percentage point rate hike in September, down from 55% a month earlier.
A strong PCE reading could potentially change those expectations, but the market still needs a signal from the Fed to confirm the policy direction.
USD Still Under Pressure
The US dollar is still struggling to regain momentum after being under pressure since early August.
The US Dollar Index (DXY) is now down around 0.75% for the month and more than 2.5% from its high in late July.
Among the factors weighing on the USD are weak jobs data, changing expectations for Fed policy and the US Treasury's plan to increase its repurchase of long-term securities.
In this situation, a higher-than-expected PCE could provide support for the USD, but that strength could be limited if the Fed is still seen to be on the looser side.
What to Watch Out For?
In short, the market will be looking at three main things:
Higher PCE: Inflationary pressures are rising, higher rate expectations could return and the USD could potentially find support.
Lower PCE: Inflationary pressures are easing, opening up room for rate cut expectations and could put pressure on the USD.
PCE in line with expectations: Market focus is likely to return to Warsh's speech in Jackson Hole on Friday.
For now, PCE is an important data to retest Fed rate expectations, but the market's actual direction still depends a lot on the message Warsh will deliver.
