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EUR/USD: Trading the Euro-Zone Consumer Price Report

EUR/USD: Trading the Euro-Zone Consumer Price Report

2010-02-25 18:47:00
David Song;Michael Wright,
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Trading the News: Euro-Zone Consumer Price Report

What’s Expected
Time of release:        02/26/2010 10:00 GMT, 05:00EST
Primary Pair Impact :    EURUSD
Expected:         1.0%           
Previous:         0.9%

Impact the Euro-Zone Consumer Price Report has had on EURUSD over the last 2 months

02.25_TTN1

December 2009 Euro-Zone Consumer Price Report

Price growth in the Euro-Zone expanded in-line with expectations, with the reading accelerating to the fastest in 10 months. Annualized consumer prices climbed to 0.9% in December from 0.5% in the previous month , while the core reading for inflation advanced to 1.1% from last year. Taking a closer look at the breakdown, crude-oil prices have more than doubled since touching a low of $32.70.bbl last January, while a strengthening European economy lead the central bank to pull back some emergency measures last month. Going forward, the European Central Bank is likely to keep its borrowing costs at 1.00% as price pressures remain subdued, and the Governing Council may hold a dovish outlook for future policy as they maintain their one and only mandate to ensure price stability. Nevertheless, ECB President Jean-Claude Trichet said inflation will remain “moderate” in 2010 as he expects to see an “uneven” recovery. 02.25_TTN2

November 2009 Euro-Zone Consumer Price Report

Consumer prices in the euro-region advanced an annualized rate of 0.5% in November after unexpectedly contracting in the previous month, which fell short of forecasts for a rise to 0.6%. The reading marks the first annual rise in price growth during the last seven months, and European Central Bank projects inflation to remain “moderate,” despite oil prices surging 58% over the past year. Thus far, central banks across the world have started to withdraw stimulus measures as the global economy recovers from the recession, with the ECB stating that it will scale back some emergency loans as economic conditions improve. However, as policy makers see a risk for a protracted recovery and forecast price pressure to hold below the 2% over the next two-years, the Governing Council is like to hold the benchmark interest rate at 1.00% throughout the first-half of 2010 as the central bank aims to balance the rise for growth and inflation. 02.25_TTN3

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:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
00001_EUR 00002_EUR

How To Trade This Event Risk

Consumer prices in the Euro-Zone are forecasted to rise to an annual rate of 1.0% in January, which would be the highest reading in nearly a year, and the data is likely to spark increased volatility in the exchange rate as investors weigh the outlook for future policy. However, the monthly reading is expected to show a 0.8% decline, while the core rate is projected to weaken to 1.0% from 1.1% in December, and subdued price pressures could lead the European Central Bank to maintain a dovish policy stance going into the second-half of the year as policy makers anticipate to see an “uneven” rebound in economic activity. At the same time, the European Union maintained its economic forecast for the region and projects GDP to expand at an annualized pace of 0.7% this year, while inflation is expected to average 1.1% as the recovery remains “fragile.” Nevertheless, the CPI estimate for January showed a 1.0% advance in inflation, which fell short of expectations for a rise to 1.2%, and subdued price pressures could lead investors to scale back expectations for a rate hike this year even as the central bank aims to unwind its emergency programs over the coming months.

The Governing Council held borrowing costs at the record-low of 1.00% earlier this month, and reiterated that interest rates remain appropriate as the risks for the economy remain broadly balance. At the same time, ECB President Jean-Claude Trichet continues to expect a “moderate” recovery this year and projects the jobless rate to rise “somewhat” further as business remain reluctant to expand their labor force. Moreover, the central bank head argued that not all of the emergency measures will be needed as economic and financial conditions improve, and noted that the Governing Council will decide on the pace of normalizing policy at its next meeting in March. However, the central bank argued that “high levels of public deficits and debt place an additional burden on monetary policy” in its monthly report, and we may see the central bank maintain a dovish stance next month as the central bank aim to encourage a sustainable recovery.

A rise in inflation could stoke a hawkish outlook for future policy as the central bank aims to balance the risks for the economy, and price action following the data could drive the single-currency higher as the ECB maintains its one and only mandate to ensure price stability. Therefore, if the annualize rate increases to 1.0% or higher, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lot of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance, and this risk will generate our first mark. Our second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its target in order to lock-in our profits.

In contrast, the ongoing weakness in the domestic economy could stoke additional downward pressures on price growth, and a dismal CPI reading is likely to weigh on the exchange rate as the central bank maintains a dovish outlook for future policy. As a result, if the inflation rate holds steady at 0.9% or falls back from its current level, we will favor a bearish outlook for the single-currency, and will implement the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.

02.25_TTN4

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To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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