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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:


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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




Consumer Confidence (FEB)



Advance Retail Sales (MoM) (JAN)



Durable Goods Orders (DEC)



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




Non-Farm Payrolls (JAN)



Average Hourly Earnings (YoY) (JAN)



Personal Income (DEC)



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

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


Data Released



Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)



01/16/2014 13:30 GMT





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 Follow me on Twitter at @DavidJSong.

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