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

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

2011-10-18 18:49:00
David Song, Currency Strategist
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Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 10/19/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 3.9%

Previous: 3.8%

DailyFX Forecast: 3.8% to 4.2%

Why Is This Event Important:

The headline reading for U.S. inflation is expected to increase at an annualized pace of 3.9% in September, which would mark the fastest pace of growth since 2009, and heightening price pressures may spark a bullish reaction in the greenback as it dampens the prospects for additional monetary easing. As price growth continues to move away from the 2% target for inflation, the rise in consumer prices may become a growing concern for the Federal Reserve, and the central bank may talk down speculation for another round of quantitative easing as higher prices sap purchasing power for households. However, the FOMC may keep the door open to expand monetary policy further as the slowing recovery in the U.S. dampens the outlook for inflation, and the central bank may take additional steps to stimulate the ailing economy in an effort to curb the risk of a double-dip recession.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (SEP)

0.7%

1.1%

Producer Price Index (YoY) (SEP)

6.4%

6.9%

Import Price Index (YoY) (SEP)

12.4%

13.4%

The Downside

Release

Expected

Actual

Consumer Credit (AUG)

$8.000B

-$9.501B

Personal Income (AUG)

0.1%

-0.1%

Consumer Confidence (SEP)

46.0

45.4

The expansion in private sector consumption may encourage businesses to pass on higher costs onto consumers, and a higher-than-expected CPI print may lead the EUR/USD to extend the reversal from 1.3913 as market participants scale back speculation for additional monetary support. However, the slowdown in wage growth paired with the drop in consumer credit may lead firms to absorb higher costs, and a soft inflation report could weigh on the exchange rate as it endows the Fed with the ability to expand monetary policy further. In turn, the euro-dollar may continue to recoup the sharp decline from the previous month, and the exchange rate may work its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot032.png, EUR/USD: Trading the U.S. Consumer Price Report

How To Trade This Event Risk

As heightening price pressures limit the Fed’s ability to ease policy further, a rise in the consumer price index could prop up the greenback, and the market reaction to the release could pave the way for a long U.S. dollar trade as market participants scale back speculation for QE3. Therefore, if the headline reading for inflation advances to 3.9% or greater in September, we will need to see a red, five-minute candle following the report to generate a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the fist trade reaches its mark in order to preserve our profits.

On the other hand, the slowdown in wage growth paired with the ongoing weakness in household sentiment may encourage businesses to keep a lid on consumer prices, and a soft CPI report is likely to weigh on the reserve currency as market participants increase bets for more monetary stimulus. As a result, if the headline reading holds steady from the previous month or comes in below 3.8%, we will carry out the same strategy for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

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)

AUG 2011

09/15/2011 12:30 GMT

3.6%

3.8%

+87

+77

August 2011 U.S. Consumer Price Index

Consumer prices in the world’s largest economy increased an annualized pace of 3.8% in August, while the core rate of inflation advanced 2.0% during the same period to mark the fastest pace of growth since November 2008. The breakdown of the report showed a 1.2% advance in energy costs paired with a 1.1% rise in the price of apparel, while prices for food and beverages grew 0.5% during the same period after climbing 0.4% from the previous month. Heightening price pressures may impede on the Fed’s ability to stimulate the ailing economy, and we may see the FOMC uphold a wait-and-see approach throughout the remainder of the year in an effort to balance the risks for the region. The initial reaction to the CPI was short-lived, with the EUR/USD climbing back above 1.3900, but the greenback recouped some of its losses during the North American trade as the exchange rate settled at 1.3875 at the end of the day.

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

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio in the DailyFX Trading Room to cover the event LIVE!

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

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