The core Personal Consumption Expenditures (PCE) Price Index is anticipated to increase by 0.3% month-on-month and 2.6% year-on-year for January. Annual PCE inflation is expected to slightly decrease to 2.5% from 2.6% in December.

The Bureau of Economic Analysis will release the PCE data on Friday at 13:30 GMT. The Federal Reserve’s interest rate policy is expected to remain unchanged in the coming months, with little likelihood of a cut in March.

Core PCE inflation, which excludes food and energy prices, is projected to drop to 2.5% annually. Personal spending is also expected to decline for the first time since March.

Market reactions to the PCE data may vary. A monthly increase of 0.4% or more could strengthen the US Dollar, while a decrease below 0.2% may weaken it.

Current predictions suggest there is a 98% likelihood of the Fed maintaining its interest rate policy in March. It may require multiple soft readings of PCE inflation for market sentiment to shift towards a rate cut in May.

The upcoming PCE inflation data, if aligned with expectations, would indicate a slight easing in price pressures, though not enough to shift the Federal Reserve’s policy stance in the near term. The year-on-year figure dipping to 2.5% would continue the broader trend of disinflation, but a 0.3% monthly rise suggests that progress remains gradual rather than decisive. With inflation data being a core input for Fed decision-making, traders will want to assess whether this release supports the market’s current rate expectations or introduces new concerns.

The figures will be published at 13:30 GMT on Friday, a release that will be closely monitored by market participants. Given the Fed’s well-telegraphed position, there’s little reason to expect sudden shifts in rate policy ahead of the March meeting. The prospect of cuts is currently seen as a discussion for later months, provided inflation continues to cool at a steady pace.

Core PCE, which strips out the more volatile food and energy components, is anticipated to cool slightly to 2.5% on an annual basis. This would place it closer to the Fed’s 2% target, but not convincingly enough to warrant a policy shift just yet. Personal spending, which has remained relatively resilient in recent months, is expected to decline for the first time since last March. If confirmed, this could signal emerging softness in consumer demand, something policymakers are likely watching closely.

Reactions in financial markets will hinge on the exact readings. Should the monthly core number rise to 0.4% or higher, it could provide the US Dollar with a boost, reinforcing expectations that the Fed will keep rates elevated for longer. Conversely, if the reading comes in below 0.2%, markets may reassess rate-cut probabilities, weighing on the currency instead.

At present, futures markets see virtually no chance of a rate reduction in March, with odds of a standstill at 98%. For sentiment to evolve towards a potential May cut, traders will likely need to see a series of tame PCE readings, reinforcing the case that inflation is tracking towards the Fed’s objective without further intervention.