Pre-Christmas U.S. Data May Contribute to Falling U.S. Dollar | Daily Market Analysis

Key events:      

• USA – Core Durable Goods Orders (MoM) (Nov)
• USA – Core PCE Price Index (MoM) (Nov)  
• Canada – GDP (MoM) (Oct)  
• USA – New Home Sales (Nov)

Should we expect another gift from the markets in the form of volatility before Christmas? The past year has been a tumultuous one in currency markets, but there are still a few days ahead - and a last-minute data summary awaits us: the Bureau of Economic Analysis (BEA) will release personal consumption expenditures (PCE) and the US Census Bureau will release durable goods orders, to be released today at 1:30 PM GMT. The combination of low liquidity and last-minute adjustments by money managers could cause more action than usual and put pressure on the U.S. dollar.

There are two major events, and both must move in the same direction to cause more than just choppy trading.

Core PCE

Personal Consumption Expenditures is an inflation indicator that uses a different methodology than the Consumer Price Index (CPI). Although the CPI report is published before the PCE report, the Federal Reserve (Fed) prefers the latter. The Fed focuses on the core PCE, which excludes volatile energy and food costs.

The core Consumer Price Index for November was released on December 13, and it surprised experts with a 0.2% decline against a 0.3% forecast. This release determined estimates for the core CPI, which was forecast to rise 0.2% last month. That may seem logical, but there is a catch.

CPI data are processed faster than PCE, and the pandemic has not changed that gap. The core PCE reached 5% in October, while the core CPI was 6.1% in the same month. Therefore, the core PCE has room for a downside surprise, which could be 0.1%, and maintain the gap.

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Even a confirmation of the 0.2% figure would still reflect a decline in inflation in line with the Fed's preferred measure, reducing the need for a significant rate hike. The fate of the February rate decision is in limbo: the markets and the Fed are considering either another 50bp hike or a 25bp cut.

Durable Good Orders

Durable goods orders reflect investment, thus entering the calculation of gross domestic product (GDP). Durable Goods Orders tend to be volatile because of large orders such as airplanes. After a jump of 1.1% in October, the economic calendar indicates no change in November.

More importantly, the indicator for non-defense orders without aircraft - the so-called "core core" - is also projected to remain unchanged after a more moderate 0.6% increase. This is where the downside surprise could occur.

As you can see from the chart below, the core indicator also tends to fluctuate considerably, and a drop cannot be ruled out. Again, even the "as expected" indicator will be a disappointment. The lack of investment growth means that the Federal Reserve's tightening measures are forcing businesses to cut spending, cooling the economy.

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As described above, there is reason to expect both Core PCE and Durable Goods Orders to raise doubts about America's economic strength, putting pressure on the U.S. dollar. Another reason to expect a decline in the time of year, the markets are usually buoyant in the run-up to Christmas, favoring risky assets and moving away from the safe-haven U.S. dollar.

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Last but not least, the global reserve currency had a successful year, rising across the board and remaining at high levels despite the fall downturn. Some profit-taking is possible in the run-up to the holidays.

Liquidity is low at this time of year, which means the possibility of one large order throwing currencies off balance and then the movement coming to naught.