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EUR/USD Risks Larger Bound on Dismal U.S. Consumer Price Index (CPI)

EUR/USD Risks Larger Bound on Dismal U.S. Consumer Price Index (CPI)

2015-05-22 08:00:00
David Song, Shuyang Ren,
Share:

- Headline U.S. Consumer Price Index (CPI) to Contract for Second Straight Month- First Since 2009.

- Core Rate of Inflation to Slow to Annualized 1.7%- First Downtick for 2015.

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

A further contraction in the headline U.S. Consumer Price Index (CPI) may drag on the greenback and spur a near-term rebound in EUR/USD as it raises the Fed’ scope to further delay the normalization cycle.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

The disinflationary environment may become a growing concern for the Fed as it struggles to achieve the 2% goal for price growth, and we may see a growing number of central bank officials look to preserve the zero-interest rate policy (ZIRP) for an extended period of time in an effort to encourage a stronger recovery.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (MAY P)

95.9

88.6

Advance Retail Sales (MoM) (APR)

0.2%

0.0%

Average Weekly Earnings (YoY) (APR)

2.3%

2.2%

Waning confidence paired with the ongoing weakness in household consumption may encourage U.S. firms to offer discounted prices, and a marked downtick in the CPI may generate a bearish reaction in the greenback as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Housing Start (MoM) (APR)

9.6%

20.2%

ISM Non-Manufacturing (APR)

56.2

57.8

Consumer Credit (MAR)

$15.800B

$20.523B

Nevertheless, the expansion in service-based activity along with the pickup in private-sector credit may encourage a sticky inflation print, and a positive development may boost the appeal of the reserve currency as the Fed remains on courses to normalize monetary policy in 2015.

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How To Trade This Event Risk(Video)

Bearish USD Trade: U.S. Headline & Core CPI Show Greater Risk for Disinflation

  • Need to see green, five-minute candle following the release to consider a long trade on EUR/USD.
  • If market reaction favors a bearish dollar trade, buy EUR/USD 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: Consumer Price Index Exceeds Market Forecast

  • Need red, five-minute candle to favor a short EUR/USD trade.
  • Implement same setup as the bearish dollar trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Failure to retain the bullish formation in price & the Relative Strength Index (RSI) raises the risk for a further decline in EUR/USD.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but continues to narrow going into the holiday weekend as it currently sits at -1.31.
  • Interim Resistance: 1.1520 (61.8% expansion) to 1.1532 (February high)
  • Interim Support: 1.0970 (38.2% expansion) to 1.1000 (50% retracement)

Read More:

USDOLLAR Daily RSI Sequence Serves as a Warning

GBP/USD Bullish Outlook to Gather Pace on Hawkish BoE Rhetoric

Impact that US CPI 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)

MAR

2014

04/17/2015

12:30 GMT

0.0%

-0.1%

-64

-22

March 2015 U.S. Consumer Price Index

EUR/USD Chart

The U.S. Consumer Price Index (CPI) unexpectedly contracted an annualized 0.1% in March, while the core rate of inflation climbed to 1.8% amid forecasts for a 1.7% clip. Despite the ongoing weakness in the CPI, the stickiness in core price growth may keep the Fed on course to normalize monetary policy in 2015 as the central bank anticipates a stronger recovery to emerge in the coming months. The stickiness in the core CPI propped up the dollar, with EUR/USD slipping below the 1.0800 handle, but the greenback struggle to hold its ground throughout the day at the pair closed at 1.0799.

--- 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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