US Dollar Drives Higher as Fed’s Favorite Inflation Gauge Hits Target


Talking Points:

  • PCE Core for August was released at 2%, matching last month’s reading and forecasts
  • Personal income read in slightly below target
  • Dollar strength derived from Euro weakness continued with the data release

The Fed’s favorite inflation measure came in on target Friday, just two days after the central bank hiked interest rates. Personal consumption expenditure core read 2%, landing on target for expectations and last month’s reading. PCE deflator also hit the forecasted 2.2% and has been shown to be a more comprehensive and consistent gauge of inflation in the United States. Another important metric, personal income, was released in conjunction with PCE Friday.

According to estimates by the Bureau of Economic Analysis, personal income increased by $60.3 billion in August. The increase translates to a gain of 0.3%, which fell short of the 0.4% forecast. Conversely, personal spending reached the forecasted 0.3% but slipped from last month’s 0.4%. The consistency of the data should assure the Fed of their path moving forward and offered some strength to the Dollar in early trading hours.

The Dollar basket started off strong Friday, driving higher on the back of positive data and Euro weakness. Following budget statements from the Italian government, Euro risk aversion rose and resulted in a sell-off of the currency. Consequently, the Dollar basket is poised for a third consecutive day of gains after the Fed’s decision.

US Dollar Basket Price Chart, 1-Hour September 24th – 28th

US Dollar Price Chart - Fed's Inflation Gauge

At the time of this article’s release, the Dollar basket boasted a 0.22% gain for the day that it should hold onto barring any breaking news and the calm economic calendar. Next week however, trade talks and US employment figures could disrupt the Dollar’s strength seen this week.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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