Summary:

• FED’s prefered gauge of inflation was lower in May, but in line with market’s expectations
• Meanwhile, personal income and personal spending turned out to be better than expected
• After all the data should have a limited impact on the greenback as the next week will be crucial for dollar’s performance

Analysis:

The US Personal Consumption Expenditure (PCE) price index declined 0.1% for May following a 0.2% gain the previous month. The year-on-year rate declined to 1.4% from 1.7% and compared with an expected rate of 1.5%. The core PCE index rose 0.1% on the month which was in line with expectations, although the year-on-year rate declined to 1.4% from 1.5% due to a downward revision for the April data. The underlying year-on-year data was in line with consensus forecasts. The slowdown in inflation could give the Fed more to chew over as it considers how fast to raise U.S. interest rates. The central bank would like to see inflation hew close to 2%, but the sudden deceleration appears to have confounded them.

 PCE data confirmed a slowdown in inflation as indicated by the CPI gauge. source: Bloomberg

 Meanwhile, Americans enjoyed a healthy increase in income last month but didn’t spend much of the gain. The Commerce Department said Friday that personal income rose 0.4% in May, up from a 0.3% in April. But consumer spending rose just 0.1% last month after climbing 0.4% in both March and April. After-tax income rose 0.6%, the biggest gain since December 2012. The gap between the May increase in income and the increase in spending drove the U.S. savings rate to 5.5%, the highest since last September. The report was mostly in line with expectations and confirmed a healthy recovery of the US economy.

As for the Chicago PMI, the data came out much, much better than expected. The index was estimated to be around 58.0, but it turned out to be at 65.7. It was a highest miss since January 2016. That also bodes well ahead of the Monday’s ISM manufacturing figures that will begin a crucial week for the USD. 

 A positive trend in the Chicago PMI shows a solid basis on the US growth. If the trend is to continue, we could expect a beat in July’s Manufacturing ISM. source: Bloomberg

After all the data could be seen as mildly positive for the US dollar. Soft indicators such as Chicago PMI are beating expectations and should allow the FED to go on with its tightening plans. If the inflation catches up, a more aggresive wording from the central bank could be even more hawkish than usuall. In such scenario USDJPY should be the one to watch. As we can see, the pair rebounds from an important support area at 111.80 and pinbar could be forming on the D1 chart. A break below the mentioned demand zone is needed if the UJ is to fall further. If it holds, expect a move towards recent highs.

 USDJPY rebounded from the support at 111.80. A break lower is needed for the pair to fall further.