EUR/USD: Trading the U.S. Consumer Price Index Report

Trading the News: U.S. Consumer Price Index

What’s Expected

Time of release:                  04/15/2009 12:30 GMT, 08:30 EST
Primary Pair Impact :          EURUSD

Expected:                              -0.1%

Previous:                               0.2%

Impact the U.S. Consumer Price Index report had over EURUSD for the past 2 months

February 2009 U.S. Consumer Price Index

January 2009 U.S. U.S. Consumer Price Index

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

How To Trade This Event Risk

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the headline reading for inflation to fall 0.1% in March, which would be the first drop in the annualized rate since 1955, and mounting risks for deflation could weigh on the greenback as the world’s largest economy faces its worst economic downturn in over half a century. As the Federal Reserve maintains a 2% target for long-term price growth and pledges to expand its balance sheet by another $1.2T in an effort to stimulate the ailing economy, easing price pressures continues to raise the risks for deflation, and as Fed Chairman Ben Bernanke adopts a Keynesian approach to stem the downside risks for growth and inflation, the central bank may increase the money supply further as economic activity deteriorates at a record pace. Meanwhile, market participants have argued that the current policies put in place by Chairman Bernanke could lead to double-digit inflation as economic conditions are expected to improve in 2010 however, San Francisco Fed President Janet Yellen countered the remarks, stating that ‘disinflation, and even deflation, will represent greater risks than inflation.’ The Fed has acquired $43.9B in U.S. Treasuries since the central bank began its asset purchase program on March 25, and as policymakers plan to spend as much as $300B in government debt over the next six-months, the unprecedented measures should help to stem the risks for deflation but nevertheless, as the downturn in the global economy intensifies, prices pressures are likely to fall further throughout the year. The FOMC March Minutes stated that ‘the decline in foreign economic activity was one of the most notable developments since the January meeting,’ and went onto say that the board will need to ‘reduce the risks that inflation could persist for a time below’ the 2% target for price growth as economic activity falters. In addition, Dallas Fed President Richard Fisher reinforced the comments by the MPC, stating that ‘inflation is unlikely to present a serious threat,’ with Atlanta Fed President William Ford noting that ‘there is no question that the whole tone is towards expanding the balance sheet further,’ and the comments suggests that the central bank is open to expand its balance sheet further as the economy faces its worst financial crisis since the Great Depression. As a result, heightening risks for price stability could weigh on greenback as fundamental headwinds continues to reinforce a dour outlook for growth and inflation however, as risk trends continue to dictate price action in the foreign exchange market, a drop in market sentiment could boost demands for the U.S. dollar as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, an enhanced CPI reading could trigger a rise in the U.S. dollar on the back of long-term expectations for higher interest rates, and would lead us to take a long dollar position following the release. Therefore, if the annual rate of inflation increased 0.1% or more in March, we will look for a red, five-minute candle following the event to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, if price pressures alleviate further, mounting risks for deflation paired with a weakening outlook for growth is likely to weigh on the greenback as the region faces a deepening economic downturn. As a result, an in-line print, or a drop of more than 0.1% in the CPI would lead us to sell the dollar, and we will follow the same strategy for a long EUR/USD trade as the short position mentioned above, just in reverse.