Economists at ING expect an above-consensus 0.4% Core PCE read on Thursday, which should support the Dollar this week.

Markets are underestimating the size of Fed easing

The release of the PCE deflator on Thursday is one of the key highlights in the US calendar this week, and we forecast an above-consensus 0.4% MoM core read on the back of insurance, medical and portfolio management fees inflation boost. Personal consumption figures may come in softer than expected, but other activity indicators like the Conference Board Consumer Confidence and the ISM manufacturing should inch higher.

All in all, we expect this last week of February to encourage less aggressive bets on Fed easing. Market pricing is falling between three and four rate cuts by year-end, with a move in June 80% priced in. We see USD rates receiving one – potentially final – round of support on the back of strong PCE figures and the Dollar to have a good week.

Our outlook beyond the short-term remains bearish on the Dollar as we think markets are underestimating the size of Fed easing