- 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.
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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:
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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
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 | Pips Change |
|---|---|---|---|---|---|
DEC 2014 | 01/16/2014 13:30 GMT | 0.7% | 0.8% | -51 | -39 |
December 2014 U.S. Consumer Price Index
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.
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