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Bearish EUR/USD Outlook Vulnerable to Dismal U.S. CPI

Bearish EUR/USD Outlook Vulnerable to Dismal U.S. CPI

David Song, Shuyang Ren,

- Annualized U.S. Consumer Price Index (CPI) to Contract for First Time Since July 2009.

- Core Rate of Inflation to Hold at 1.6% for Second-Month.

For more updates, sign up for David's e-mail distribution list.

Trading the News: U.S. Consumer Price Index (CPI)

The U.S. Consumer Price Index (CPI) may trigger a more meaningful correction in the greenback and spark a larger rebound in EUR/USD as the headline reading is expected to decline an annualized 0.1% in January to mark the first contraction since 2009.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

However, the stickiness in the core rate of inflation may keep the dollar afloat and encourage Fed policy makers to move towards a mid-2015 rate hike as Chair Janet Yellen sees lower energy having a positive impact on the real economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (FEB)

99.5

96.4

Advance Retail Sales (MoM) (JAN)

-0.4%

-0.8%

Durable Goods Orders (DEC)

0.3%

-3.4%

Waning confidence paired with the slowdown in household spending may encourage U.S. firms to further discount consumer prices, and a sharp decline in the CPI may undermine the bullish sentiment surrounding the dollar as it raises the Fed’s scope to retain the zero-interest rate policy beyond mid-2015.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (JAN)

228K

257K

Average Hourly Earnings (YoY) (JAN)

1.9%

2.2%

Personal Income (DEC)

0.2%

0.3%

Nevertheless, businesses may scale back on discounting amid the ongoing improvement in job/wage growth, and a better-than-expected CPI print may generate a bearish break in EUR/USD as it fuels interest rate expectations.

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How To Trade This Event Risk(Video)

Bearish USD Trade: Consumer Prices Contract Annualized 0.1% or Greater

  • Need to see green, five-minute candle following the release to consider a long trade on EURUSD
  • If market reaction favors a bearish dollar trade, buy EURUSD with two separate position
  • Set stop at the near-by swing low/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 USD Trade: U.S. Inflation Report Tops Market Forecast

  • Need red, five-minute candle to favor a short EURUSD trade
  • Implement same setup as the bearish dollar trade, just in the opposite direction

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • EUR/USD remains stuck in a triangle/wedge formation, but the continuation pattern continues to highlight a bearish outlook especially as the RSI retains the downward trend.
  • Interim Resistance: 1.1440 (23.6% retracement) to 1.1480 (78.6% expansion)
  • Interim Support: 1.1300 (161.8% expansion) to 1.1310 (100% expansion)

Read More:

EURUSD Technicals Back in Focus- February Opening Range Setup

Price & Time: The March Inflection Point in Crude

Impact that the U.S. CPI report has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

DEC

2014

01/16/2014 13:30 GMT

0.7%

0.8%

-51

-39

December 2014 U.S. Consumer Price Index

EUR/USD Chart

The U.S. Consumer Price Index (CPI) reached the lowest level since October 2009 as the headline reading narrowed to an annualized rate of 0.8% in December from 1.3% the month prior, largely driven by lower energy prices. At the same time, the core inflation unexpectedly slowed to 1.6% from 1.7% during the same period. Even though the Fed anticipates low energy prices to be a net positive to the U.S. economy, the disinflationary environment may push the Fed to further delay its normalization cycle as the central bank struggles to achieve its 2% target for price growth. Nevertheless, the greenback strengthened following the better-than-expected CPI print, with EUR/USD dipping below the 1.1500 handle, but the pair consolidated following the European close to end the day at 1.1157.

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

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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