Core PCE higher than expected; Fed also paying close attention to ECI

Considered to be the Fed’s favorite measure of inflation, December’s Core PCE (Personal Consumption Expenditure), which excludes food and energy, rose at a rate of 4.9% YoY. The print beat estimates of 4.8% YoY. It also was higher than November’s print of 4.7% YoY. This was the highest Core PCE reading since September 1983!

But there is a new sheriff in town that the Fed is focusing on: ECI (Employment Cost Index). Fed Chairman Powell referred this metric in his press conference following the FOMC meeting on Wednesday. The ECI shows employee compensation and total costs of labor for employers. The Fed has been paying attention to this economic data print, as Powell noted that rising wages were a contributing factor to the increase in overall inflation. The Q4 Employment Cost Index was 1% vs 1.2% expected and 1.3% in Q3. This print may calm the nerves of Fed officials, as the Q3 ECI was the highest in over 30 years.

EUR/USD had been has been moving lower in an orderly channel since May 2021. After posting a false breakdown below the range to 1.1186 on November 24^th, 2021, the pair moved back inside the channel. EUR/USD traded sideways in a tight range until January 12^th, when the pair posted a false breakout to the topside of the channel near 1.1490. EUR/USD then pulled back inside the channel and has accelerated lower, taking out the out the 1.1186 low from November. Price has recently tested support from March 2020 near 1.1144.

Source: Tradingview, Stone X

First resistance is at the prior breakdown point of 1.1186 and then horizontal resistance at 1.1234. Above there, resistance is at the 38.2% Fibonacci retracement from the highs of January 14^th to the lows of January 28^th, near 1.1260. Support below is plentiful. The first level is the January 28^th lows at 1.1121, which confluences with the 127.2% Fibonacci extension from the November 24^th lows to the January 14^th highs at 1.1105. Below there, price can fall to the bottom trendline of the channel near 1.1041, which is just ahead of long-term horizontal support at 1.1020.

Source: Tradingview, Stone X

The Fed is very worried about inflation. Its favorite data point has been Core PCE, which was higher than expected. However, they have recently turned their attention to the ECI, which was better than expected. A rate hike is priced into the market for the March meeting. If the Core PCE begins to downtick, could they pull in the reigns just a bit after that? The Fed said they will be watching the data, therefore, we should as well!

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.