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Slowing Euro CPI to Heighten Bearish EUR/USD Outlook Ahead of ECB

Slowing Euro CPI to Heighten Bearish EUR/USD Outlook Ahead of ECB

2014-08-29 04:00:00
David Song, Shuyang Ren,
Share:

- Euro-Zone Consumer Price Index (CPI) to Slow to 0.3%- Lowest Since October 2009

- Core Inflation to Hold Steady at 0.8% for Third Consecutive Month

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Trading the News: Euro-Zone Consumer Price Index (CPI)

Another downside in the Euro-Zone’s Consumer Price Index (CPI) may heighten the bearish sentiment surrounding the EUR/USD as it puts increased pressure on the European Central Bank (ECB) to further embark on its easing cycle.

What’s Expected:

EUR/USD CPI

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Why Is This Event Important:

ECB President Mario Draghi may show a greater willingness to implement more non-standard measures at the September 4th meeting should the CPI print show a larger threat for deflation, and the EUR/USD may continue to weaken throughout the second-half of 2014 as interest rate expectations deteriorate.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Markit Purchasing Manager Index Composite (AUG P)

53.4

52.8

Gross Domestic Product s.a. (QoQ) (2Q A)

0.1%

0.0%

Retail Sales (MoM) (JUN)

0.5%

0.4%

The slowdown in business outputs paired with the renewed weakness in private sector consumption may drag on price growth, and the growing risk for deflation may push the ECB to adopt more emergency measures in an effort to achieve its one and only mandate to deliver price stability.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Business Climate Indicator (AUG)

0.10

0.16

M3 Money Supply (YoY) (JUL)

1.5%

1.8%

Producer Price Index (MoM) (JUN)

0.0%

0.1%

The pickup in producer prices along with the expansion in the money supply may limit the downside risk for inflation, and a better-than-expected CPI print may encourage a more meaningful rebound in the EUR/USD as it gives the ECB greater scope to retain its current approach for monetary policy.

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How To Trade This Event Risk(Video)

Bearish EUR Trade: Euro-Zone CPI Slips to 0.3% or Lower

  • Need red, five-minute candle following the release to consider a short EUR/USD trade
  • If market reaction favors selling Euro, short EUR/USD 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

Bullish EUR Trade: Headline Reading for Inflation Exceeds Market Forecast

  • Need green, five-minute candle to favor a long EUR/USD trade
  • Implement same setup as the bearish Euro trade, just in opposite direction

Read More:

Price & Time: Cue the "Most Hated Rally in History" Talk

EUR/USD Attempting to Break Downtrend from Mid-August - Key Levels

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily

Chart - Created Using FXCM Marketscope 2.0

  • Remains at Risk for Further Losses as Long as RSI Holds in Oversold Territory
  • Interim Resistance: 1.3510 (38.2% expansion) to 1.3520 (38.2% retracement)
  • Interim Support: 1.3140 (38.2% retracement) to 1.3150 Pivot

Impact that the Euro-Zone CPI report has had on EUR during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL 2014

07/31/2014 9:00 GMT

0.4%

0.5%

-4

-4

July 2014 Euro-Zone Consumer Price Index

EUR/USD Chart

The Euro-Zone Consumer Price Index (CPI) narrowed to an annualized rate of 0.4% from 0.5% the month prior, hitting a 5-year low. The print was also below the average estimate of 0.5%. Even though the core rate of inflation held steady at 0.8% for the second-month, price growth remains well below the ECB’s 2.0% target. Nevertheless, the ECB argued that lackluster print was attributed to volatile components, such as food and energy. However, there is no evidence that the inflation would pick up with the target soon, since ECB just announced a rate cut in June. The pair EUR/USD declined slowly after the release of the Eurozone CPI, but came back soon after and ended the day at 1.3386.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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