Investors have their radar focused on the July data of the Personal Consumption Expenditure (PCE) price index, due on Thursday at 8:30 a.m. EST. The Fed's most prominent inflation gauge carries a critical importance in shaping the central bank's future decisions on interest rates.

Following its peak at 7% in June 2022, PCE inflation has gradually receded to 3% by June 2022. The forthcoming release of July's PCE data assumes paramount importance. It may validate traders' perspectives on the sustained trajectory of declining inflation.

During the Federal Reserve's Jackson Hole economic symposium, Fed Chair Jerome Powell reiterated his commitment to "achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to the 2% target."

Powell also underscored the significance of looking at the core PCE inflation, which excludes volatile food and energy items, in offering a more accurate insight into the direction of underlying inflation trends.

July PCE Inflation: What is The Market Expecting?

  • The headline PCE inflation is expected to rise from 3% in June to 3.3% in July
  • In monthly terms, the PCE inflation is expected to advance 0.2% in July, matching June's pace.
  • If the data aligns with economists' estimates, the annual PCE inflation rate would match the July's consumer price index (CPI) inflation rate.
  • Core PCE inflation is expected to edge from 4.1% to 4.2% year-on-year in July.
  • On a monthly basis, core PCE inflation is expected to advance 0.2% in July, matching June's increase.
  • If the data aligns with economists' estimates, the core PCE inflation rate would be 0.4 percentage points lower than the core CPI inflation rate seen in July.
Fed Rate Hike Expectations And Market Reactions

A PCE report that aligns with or falls below expectations is likely to solidify market anticipations of a Federal Reserve pause in interest rate hikes for September, while also reducing the likelihood of a rate increase in November. This outcome would probably have a negative impact on the U.S. dollar while yielding positive effects for bonds, stocks, and gold.

If the PCE report surpasses expectations, it could rekindle speculations about additional rate hikes by the Federal Reserve.

This may lead to a surge in the value of the U.S. dollar while causing setbacks for both stocks and bonds.

Risk sentiment was higher on Wednesday, following lower-than-predicted Q2 GDP and ADP employment readings, with the SPDR S&P 500 Trust (SPY  ) up 0.3% by midday.

According to implied probabilities extracted from Fed futures, there is a modest 9% likelihood of a rate hike in September - a decline from yesterday's 14%. Turning to the November outlook, the chances of a rate hike have decreased from 49% to a 43% probability, as indicated by CME Group's Fedwatch tool.