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

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

David Song, Strategist

Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 01/16/2013 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 1.8%

Previous: 1.8%

DailyFX Forecast: 1.8% to 2.0%

Why Is This Event Important:

U.S. consumer prices are projected to increase an annualized 1.8% for the second month in December, and subdued price growth may dampen the appeal of the reserve currency as it raises the Fed’s scope to expand its balance sheet further. As the FOMC expects inflation to hold below the 2% target over the policy horizon, easing price pressures may spur bets for additional monetary support, but we may see a growing number of central bank officials scale back their willingness to expand the open-asset purchase program beyond the $80B/month limit as the economic recovery gradually gathers pace.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (DEC)

0.2%

0.5%

Average Weekly Earnings (MoM) (DEC)

0.2%

0.3%

Personal Income (NOV)

0.3%

0.6%

The Downside

Release

Expected

Actual

Produce Price Index (YoY) (DEC)

1.4%

1.3%

Import Price Index (YoY) (DEC)

-1.5%

-1.5%

Consumer Confidence (DEC)

70.0

65.1

The resilience in private sector consumption along with the pickup in wage growth may encourage businesses to raise consumer prices, and stronger-than-expected inflation print should increase the appeal of the USD as it dampens expectations for more quantitative easing. However, the recent weakness in household sentiment along with easing input costs may prompt firms to offer further discounts, and a slowdown in the headline reading for inflation may fuel bets for additional asset purchases as the Fed maintains a cautious tone for the world’s largest economy.

Potential Price Targets For The Release

Forex_EURUSD_Trading_the_US_Consumer_Price_Report_body_ScreenShot177.png, Forex: EUR/USD- Trading the U.S. Consumer Price Report

The short-term pullback in the EURUSD looks poised to turn into a larger correction amid the bearish divergence in the relative strength index, and we may see the pair fall back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 as the oscillator comes off of overbought territory. However, a further slowdown in price growth may spark a bearish reaction in the dollar as it fuels speculation for more easing, and we may see the EURUSD may a run at the 50.0% Fib around 1.3500 as the Federal Reserve adopts a ‘qualitative approach’ for monetary policy.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our other trades as the headline reading for inflation is expected to hold steady in December, but an unexpected uptick in the CPI could pave the way for a long dollar trade as it dampens expectations for more easing. Therefore, if prices increase 1.8% or greater from the previous month, we will need a green, five-minute candle following the release to establish a short entry on two-lots of EURUSD. Once these conditions are fulfilled, we will place 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 hits its mark in an effort to preserve our profits.

In contrast, the ongoing slack in the real economy paired with the easing input costs may drag on the headline reading for inflation, and a lackluster CPI print may drag on the greenback as it fuels expectations for more QE. As a result, if the report falls short of market expectations, 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)

NOV 2012

12/14/2012 13:30 GMT

1.9%

1.8%

+2

+76

November 2012 U.S. Consumer Price Index

Forex_EURUSD_Trading_the_US_Consumer_Price_Report_body_ScreenShot176.png, Forex: EUR/USD- Trading the U.S. Consumer Price Report

The headline reading for U.S. inflation narrowed to 1.1.8% in November from 2.2% the month prior, while core consumer prices increased 1.9% during the same period amid forecasts for a 2.0% print. The initial reaction to the inflation was short-lived as the EURUSD moved back above the 1.3100 figure, and the pair pushed higher throughout the North American trade as the exchange rate closed at 1.3160.

http://forexforums.dailyfx.com/dailyfx-education-videos-forex-trading-strategies/89952-dailyfx-trading-news.html?cmp=SFS-70160000000ELfrAAG--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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