The September CPI report is expected to show inflation falling to 5.0% as the recent easing of oil prices are expected to have alleviated price pressures. Indeed, the core reading, which strips out food & energy is expected to stay unchanged at 2.5%. The previous record run of oil prices which reached as high as $147 per barrel as still filtering through to other products which may keep prices elevated in the near term. However, the expectations that the global economy are slowing has considerable lowered inflation expectations and therefore the potential impact of this report.
How To Trade This Event Risk
The September CPI report is expected to show inflation falling to 5.0% as the recent easing of oil prices are expected to have alleviated price pressures. Indeed, the core reading, which strips out food & energy is expected to stay unchanged at 2.5%. The previous record run of oil prices which reached as high as $147 per barrel as still filtering through to other products which may keep prices elevated in the near term. However, the expectations that the global economy are slowing has considerable lowered inflation expectations and therefore the potential impact of this report. Producer prices falling to 8.7% from 9.6% validates the current outlook and may signal that inflation may continue to ease. Yet, the increase in the core reading for factory gate prices to 4.0% from 3.6% has to give policy makers some concern, especially after the billions of dollars in liquidity that has been pumped into the system. Therefore, higher than expected inflation could see interest rate expectations raise and the chances of further easing by the Fed diminish.
Fed funds futures currently show traders pricing in a 64% chance of a quarter point rate cut at the October 29 meeting versus 92.0% a day ago. A hotter than expected inflation report will raise the odds of a rate hike, but it may have little impact given the current concerns over growth. Therefore, we would look for an increase in CPI to 5.5% in the headline number with a 2.7% in the core read, for a long dollar position (Short EUR/USD). With a confirmed, positive fundamental release we will look for a five-minute red candle to confirm entry on two lots of EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to major resistance in the vicinity) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand ,concerns are growing that the credit crisis and housing slump will severely impact growth throughout next year and without the threat of inflation, the central bank may continue to ease rates. A drop in consumer prices lower than 4.8% will trigger a dollar bearish trade. We will follow the same strategy for a short as the long above, just in reverse.