Ever since the last Federal Reserve meeting markets have been slowly adjusting to the prospect of higher US rates for a longer period of time. This has helped support the USD, send US 10-year yields higher, and keep a lid on recent gold gains. This is what you would expect to happen.

Projections, not promised

However, it should be noted that the Federal Reserve is not guaranteeing a future, higher path of interest rates. Instead, it is projecting them. This means that if incoming inflation data drops much more rapidly than the Fed is expecting, it would be reasonable to expect US yields to fall, the USD to fall, and gold to gain.

The headline core y/y PCE print is expected to come in at 3.9% down from the prior reading of 4.2%. The headline y/y PCE is expected to come in at 3.5%, down from the prior reading of 3.3%, so what we need to look for is a surprise print that is much higher or lower than markets are anticipating. In this way, we are likely to see a snap reaction in both yields and the dollar which in turn should influence gold prices. Remember, that the PCE is the Fed’s preferred measure of inflation so a surprise print higher is likely to get the Fed’s attention.

What to expect

If the PCE print is much higher than markets are expecting then watch for near-term USD strength, EURUSD downside, stock downside (on the prospect of higher rates), and gold downside.

If the PCE print comes in much lower than markets are expecting then watch for near-term USD weakness, EURUSD upside, stock upside (on the prospect of lower rates), and gold upside.

Major trade risk

The major trade risk to know here is that the market can always surprise us with the way it reacts. Furthermore, on top of this, it should be noted that the reaction to the PCE print is likely to be a short-term reaction given the fact it’s just one data point. Also, the print may come in within market expectations.