Week Ahead: Can sticky inflation keep the dollar supported?
Markets may be underestimating how complicated the Federal Reserve’s next move has become.
Next week’s US Core PCE report could become the key catalyst for fresh volatility across FX markets as investors reassess the outlook for US interest rates.
And this comes at a delicate moment for the Fed.
Bloomberg’s latest survey shows that many analysts now expect the Federal Reserve to leave rates unchanged through the end of 2026 as inflation risks remain elevated.
Chicago Fed President Austan Goolsbee recently warned that cutting rates too aggressively could reignite inflation pressures.
At the same time, markets are also watching the arrival of Kevin Warsh, who is set to be sworn in as the new Fed Chair on May 22. Warsh has historically favored lower interest rates, but traders still have little clarity over how he may approach policy in the current environment.
Our focus this week will be on FXTM’s USDInd which may be preparing for a larger breakout move.
Here are 4 key factors that could drive price action:
• US Core PCE inflation
This is the Federal Reserve’s preferred inflation gauge. Core PCE is forecast to hold at 0.3% month-on-month in April, unchanged from the previous reading. A hotter-than-expected report could reinforce expectations that US rates may stay elevated for longer, supporting the dollar.
• Personal spending & income
Personal income is expected to slow from 0.6% to 0.5%, while personal spending may cool from 0.9% to 0.6%. However, resilient consumer demand may continue feeding underlying inflation pressures.
• US GDP second estimate
The second estimate of US Q1 GDP is forecast at 2.0% versus the previous 0.5%. Any disappointment here may deepen concerns over slowing economic momentum.
• Technical forces
FXTM’s USDInd continues to trade within a broader ascending channel on the daily charts while prices remain above the 50-day moving average. However, stochastic indicators are approaching overbought territory, suggesting that incoming US inflation data may determine whether bulls can sustain momentum or trigger a fresh pullback.
