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

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

2011-03-16 20:00:00
David Song, Currency Strategist
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Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 03/17/201112:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 2.0%

Previous: 1.6%

DailyFX Forecast: 1.8% to 2.2%

Why Is This Event Important:

Consumer prices in the world’s largest economy are forecasted to increase at an annualized pace of 2.0% in February, and heightening price pressures could spark a bullish reaction in the U.S. dollar as investors speculate the Fed to gradually normalize monetary policy later this year. However, as the core rate of inflation is expected to hold steady at 1.0%, the mixed batch of data could make it increasingly difficult to take advantage of the market volatility, and currency traders should certainly incorporate a high degree of prudence during the current market condition as the uncertainties surrounding the global economy bears down on market sentiment. Nevertheless, a higher rate of inflation could fuel speculation for a rate hike later this year as the FOMC maintains its dual manage to ensure price stability while fostering full-employment, and the central bank may curb expectations for another round of quantitative easing as growth and inflation pick up.

Recent Economic Developments

The Upside

Release

Expected

Actual

Producer Price Index (YoY) (FEB)

4.7%

5.6%

Import Price Index (YoY) (FEB)

6.3%

6.9%

ISM Non-Manufacturing (FEB)

59.3

59.7

The Downside

Release

Expected

Actual

U. of Michigan Confidence (MAR P)

76.3

68.2

Average Hourly Earnings (YoY) (FEB)

1.9%

1.7%

Personal Consumption (4Q P)

4.2%

4.1%

As price sector activity improves, businesses may increased their willingness to pass on higher costs onto consumers, and the Fed may see scope to lift the benchmark interest rate off the record-low later this year as the recovery gathers pace. However, as consumer confidence wanes, the slowdown in private consumption may lead businesses to absorb higher input costs, and a softer-than-expected inflation report could keep the door open for additional monetary easing as the central bank aims to balance the downside risks for the region. In turn, market participants may scale back expectations for higher borrowing costs in 2011, and the Fed may continue to talk down the risk for inflation as the ongoing weakness within the real economy dampens the outlook for price growth.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot030.png, EUR/USD: Trading the U.S. Consumer Price Report

How To Trade This Event Risk

A rise in the headline reading for inflation could spark a bullish reaction in the greenback as investors speculate the FOMC to normalize monetary policy later this year, and the market reaction subsequent to the release could set the stage for a long U.S. dollar trade as interest rate expectations gather pace. Therefore, if the CPI advances an annualized 2.0% or more in February, we will need a red, five-minute candle following the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

On the other hand, businesses may continue to absorb higher costs in an effort to spawn increased demands, and an unexpectedly slowdown in price growth could bear down on the exchange rate as investors scale back speculation for a rate hike later this year. As a result, if the headline reading for inflation expands less than 1.8%, we will carry out the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. Consumer Price report has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jan 2011

02/17/2011 13:30 GMT

1.6%

1.6%

+21

+49

January 2011 U.S. Consumer Price Index

Consumer prices in the world’s largest economy grew at an annualized pace of 1.6% in January, while the core rate of inflation increased 1.0% during the same period amid forecasts for a 0.9% expansion. The breakdown of the report showed energy prices climbed 7.3% from the previous year, with transportation costs advancing 5.4%, while food prices increased 1.8% during the same period. As price pressures intensify, the Fed’s decision to expand quantitative easing by another $600B may come under increased scrutiny, and the central bank will certainly have limited room to move monetary policy as the outlook for growth and inflation remains clouded with high uncertainty. In turn, the FOMC may look to retain a wait-and-see approach throughout the first-half of 2011, and the central bank may see scope to gradually normalize monetary policy later this year as the recovery gathers pace. Nevertheless, the U.S. dollar lost ground following the mixed batch of data as a separate report showed initial and continuing jobless coming out above forecast, and the rally in the EUR/USD may gather pace going forward as it maintains the upward trend from earlier this year.

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot031.png, EUR/USD: Trading the U.S. Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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