- 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:
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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
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 | Pips Change |
|---|---|---|---|---|---|
MAR 2014 | 04/17/2015 12:30 GMT | 0.0% | -0.1% | -64 | -22 |
March 2015 U.S. Consumer Price Index
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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