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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: 03/15/2013 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.9%

Previous: 1.6%

DailyFX Forecast: 1.9% to 2.0%

Why Is This Event Important:

The headline reading for U.S. inflation is projected to increase 1.9% after rising 1.6% in January, and the pickup in price growth should prop up the U.S. dollar as it dampens the Fed’s scope to expand the balance sheet further. As the economic recover gradually gathers pace, the improved outlook for growth and inflation may encourage the FOMC to adopt a more hawkish tone for monetary policy, and we may see a growing number of central bank officials start to discuss a tentative exit strategy as the world’s largest economy gets on a more sustainable path.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (FEB)

0.5%

1.1%

Change in Non-Farm Payrolls (FEB)

165K

236K

Consumer Credit (JAN)

$14.700B

$16.151B

The Downside

Release

Expected

Actual

Produce Price Index (YoY) (FEB)

1.8%

1.7%

Average Hourly Earnings (YoY) (FEB)

2.1%

2.1%

Personal Income (JAN)

-2.4%

-3.6%

The resilience in private sector consumption along with the ongoing improvement may encourage businesses to raise consumer prices, and a large uptick in the index may heighten the bullish sentiment surrounding the greenback as the Fed looks to scale back on quantitative easing. However, subdued wage growth paired with stagnant input prices may encourage firms to push through more discounts, and we may see the FOMC maintain its highly accommodative policy stance over the near to medium-term as in an effort to encourage a stronger recovery.

Potential Price Targets For The Release

Forex_EURUSD-_Trading_the_US_Consumer_Price_Report_body_ScreenShot071.png, Forex: EUR/USD- Trading the U.S. Consumer Price Report

As the EURUSD struggles to hold above 10-Day SMA (1.3023), the pair may continue to give back the rebound from November (1.2659), and we are looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental developments coming out of the world’s largest economy dampens bets for more quantitative easing. With the long-term bearish flag formation panning out, we will maintain a bearish outlook for the EURUSD, and the pair may track lower throughout the year amid the deviation in the policy outlook.

How To Trade This Event Risk

Expectations for a faster rate of inflation favors a bullish bias for the greenback, and a large pickup in price growth may pave the way for a long U.S. dollar trade as the Fed adopts a more neutral tone for monetary policy. Therefore, if the index advances 1.9% or greater in February, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high, 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 lock-in our gains.

On the other hand, stagnant wage growth paired with subdued input costs may drag on consumer prices, and weak inflation print may drag on the dollar as it raises the Fed’s scope to expand the balance sheet further. As a result, if the release falls short of market expectations, we will implement the same strategy for a long euro-dollar trade as the short position laid out 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)

JAN 2013

02/21/2013 13:30 GMT

1.6%

1.6%

+19

+2

January 2013 U.S. Consumer Price Index

Forex_EURUSD-_Trading_the_US_Consumer_Price_Report_body_ScreenShot070.png, Forex: EUR/USD- Trading the U.S. Consumer Price Report

U.S. consumer prices increased an annualized 1.6% following the 1.7% expansion in December, while the core rate of inflation held at 1.9% for the second month amid forecasts for a 1.8% print. Although the initial reaction was fairly muted, the EURUSD made a run at the 1.3200 figure following the print, but we saw the USD regain its footing during the North American trade as the pair ended the day at 1.3188.

--- 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, please follow this link.

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