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EURUSD: Trading the U.S. Consumer Price Report

EURUSD: Trading the U.S. Consumer Price Report

David Song, Strategist

Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 06/14/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.8%

Previous: 2.3%

DailyFX Forecast: 1.8% to 2.2%

Why Is This Event Important:

The headline reading for U.S. inflation is expected to increase 1.8% in May, which would mark the slowest pace of growth since January 2011, and easing price pressures may drag on the dollar as it increases the scope for another round of quantitative easing. However, as core consumer prices are anticipated to hold above the 2% target for inflation, the stickiness in underlying price growth should keep the Fed on the sidelines, and the central bank may continue to endorse its wait-and-see approach as the world’s largest economy gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

NFIB Small Business Optimism (MAY)

94.0

94.4

U. of Michigan Confidence (MAY F)

77.8

79.3

Durable Goods Orders (APR)

0.2%

0.2%

The Downside

Release

Expected

Actual

Producer Price Index (YoY) (MAY)

1.2%

0.7%

Advance Retail Sales (MAY)

-0.2%

-0.2%

Average Hourly Earnings (YoY) (MAY)

1.8%

1.7%

The rebound in household confidence paired with greater demand for large-ticket items may prompt businesses to prop up consumer prices, and an above-forecast print may sharp a short-term reversal in the EURUSD as it dampens speculation for additional monetary support. However, easing wage growth paired with the slowdown in private sector consumption may encourage firms to conduct further discounting in an effort to draw demands. In turn, a soft inflation reading may dampen the appeal of the greenback, and we may see the EURUSD break out of the range-bound price action from earlier this month as market participants increase bets for QE3.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot097.png, EURUSD: Trading the U.S. Consumer Price Report

As the EURUSD maintains the range from earlier this month, the pair should continue to track sideways ahead of the Greek elections, but a stronger-than-expected CPI print may ultimately produce a lower top in the pair as market participants scale back bets for more easing. However, easing price pressures may fuel the rebound from 1.2287, and we may see the pair push back above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as currency traders look for additional monetary support. For a complete EURUSD technical outlook and scalp levels, refer to this week's Scalp Report.

How To Trade This Event Risk

Forecasts for a slower rate of price growth casts a bearish outlook for the greenback, but the stickiness in the core CPI may pave the way for a long U.S. dollar trade as it dampens the likelihood for more QE. Therefore, if underlying inflation comes in stronger-than-expected, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EURUSD. 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 objective. The second target will be based on discretion, and we will shift the stop on the second lot to breakeven once the first trade hits its mark in an effort to preserve our profits.

However, as subdued wage growth paired with the slowdown in household spending dampens the outlook for inflation, we may see the CPI track lower in May, and the central bank may keep the door open to expand its balance sheet further in order to combat the downside risks for inflation. As a result, if the headline reading slips below 1.8%, we will implement the same strategy for a long euro-dollar trade as the short position mentioned 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)

APR 2012

05/15/2012 12:30 GMT

2.3%

2.3%

-45

-112

February 2012 U.S. Consumer Price Index

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot096.gif, EURUSD: Trading the U.S. Consumer Price Report

Consumer prices in the world’s largest economy rose at an annual pace of 2.3% in April to mark the slowest pace of growth since February 2011, while underlying inflation held steady at 2.3% for the second consecutive month. Although the initial reaction was fairly muted, the dollar gained ground against its major counterparts, with the EURUSD ending the day at 1.2728.

--- 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

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

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

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