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Trading U.S. CPI- Faster Inflation to Trigger Further EURUSD Weakness

Trading U.S. CPI- Faster Inflation to Trigger Further EURUSD Weakness

David Song, Gregory Marks,

- U.S. Consumer Price Index to Climb 1.5%- First Rise Since July

- Core Inflation to Hold at 1.7% for Fourth Consecutive Month

Trading the News: U.S. Consumer Price Index

U.S. Consumer Prices are projected to increase an annualized 1.5% in December, which would mark the first advance since July, and a pickup in price growth may encourage the Federal Open Market Committee (FOMC) to further reduce its asset-purchase program as it dampens the threat for disinflation.

What’s Expected:

Time of release: 01/16/2014 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 1.5%

Previous: 1.2%

DailyFX Forecast: 1.4% to 1.6%

Why Is This Event Important:

A pickup in price growth may spur a further shift in the policy outlook as the Fed anticipates a more robust recovery in 2014, and the central bank may take a more aggressive approach in moving away from its easing cycle as the outlook for growth and inflation improves.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (DEC)

0.1%

0.2%

Personal Spending (NOV)

0.5%

0.5%

Personal Consumption (3Q F)

1.4%

2.0%

U.S. firms may pass on higher costs onto consumers amid the resilience in private spending, and a marked uptick in price growth should prop up the dollar as it gives the Fed greater scope to implement a more aggressive approach in normalizing monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Change in Non-Farm Payrolls (DEC)

197K

74K

Average Hourly Earnings (YoY) (DEC)

1.9%

1.8%

Personal Income (NOV)

0.5%

0.2%

However, subdued wage growth along with the persistent slack in the real economy may continue to drag on inflation, and a weak CPI print may generate a more meaningful correction in the greenback as it dampens bets for another $10B taper at the January 29 meeting.

How To Trade This Event Risk(Video)

Join DailyFX on Demand for Full Coverage of U.S. CPI

Bullish USD Trade: Consumer Prices Increased 1.7% or Greater

  • Need red, five-minute candle following the CPI print to consider a short EURUSD trade
  • If market reaction favors a long dollar trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bearish USD Trade: Price Growth Remains Subdued

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same setup as the bullish dollar trade, just in the opposite direction

Potential Price Targets For The Release

EURUSD Daily

Forex_Trading_U.S._CPI-_Faster_Inflation_to_Trigger_Further_EURUSD_Weakness_body_ScreenShot272.jpg, Trading U.S. CPI- Faster Inflation to Trigger Further EURUSD Weakness

Chart - Created Using FXCM Marketscope 2.0

  • String of Failed Closes Above 1.3800 Favors Downward Trend Dating Back to 2008
  • RSI Highlights Further EURUSD Weakness as Bearish Divergence Takes Shape
  • Interim Resistance: 1.3800 (100.0 expansion) to 1.3830 (61.8 retracement)
  • Interim Support: 1.3530 (61.8 expansion) to 1.3570 (23.6 retracement)

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

NOV 2013

12/17/2013 13:30 GMT

0.1%

0.0%

-2

+19

November 2013 U.S. Consumer Price Index

Forex_Trading_U.S._CPI-_Faster_Inflation_to_Trigger_Further_EURUSD_Weakness_body_Picture_1.png, Trading U.S. CPI- Faster Inflation to Trigger Further EURUSD Weakness

The MoM December reading for CPI came in at flat at 0.0% and missed estimates of 0.1% ahead of December’s FOMC meeting. Energy prices in November put pressure on the reading as WTI Crude hit 6 month lows towards the end of the month. Despite the miss, volatility in USD pairs remained muted as market participants awaited the FOMC December Rate Decision. This CPI print will also be the last major data print out of the U.S. ahead of the FOMC next week. With current estimates pointing to a relatively impressive 0.3% MoM change, any miss here may contribute to further pressure on the greenback ahead of the Fed.

--- 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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