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EUR/USD Rebound on Dovish Fed at Risk on Strong U.S. CPI

EUR/USD Rebound on Dovish Fed at Risk on Strong U.S. CPI

2015-06-18 08:00:00
David Song, Shuyang Ren,
Share:

- Headline U.S. Consumer Price Index (CPI) to Expand for First Time Since December.

- Core Rate of Inflation to Hold at Annualized 1.8% for Third Consecutive Month.

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

A rebound in the headline U.S. Consumer Price Index (CPI) may boost the appeal of the greenback and spur a near-term pullback in EUR/USD as it puts increased pressure on the Fed to normalize monetary policy sooner rather than later.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of stronger price growth may keep the Fed on course to raise the benchmark interest rate later this year, but a continuation of the disinflationary environment may encourage the central bank to retain the zero-interest rate policy (ZIRP) beyond 2015 in an effort to encourage a more sustainable recovery.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (JUN P)

91.2

94.6

Advance Retail Sales (MoM) (MAY)

1.2%

1.2%

NFIB Small Business Optimism (MAY)

97.2

98.3

Improved confidence along with the rebound in household spending may encourage U.S. firms to boost consumer prices, and a marked rebound in the headline reading may spark a bullish reaction in the dollar as it fuels interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Producer Price Index ex Food & Energy (YoY) (MAY)

0.7%

0.6%

ISM Non-Manufacturing (MAY)

57.0

55.7

Personal Consumption Expenditure- Core (YoY) (APR)

1.4%

1.2%

However, subdued input costs paired with the persistent slack in the real economy may continue to drag on price growth, and a dismal CPI print may generate a further near-term advance in EUR/USD as market participants push back for the Fed liftoff.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. CPI Rebounds 0.1% or Greater

  • Need to see red, five-minute candle following the release to consider a short trade on EUR/USD.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/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.

Bearish USD Trade: Consumer Price Growth Disappoints

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

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the more cautious tone coming out of the Federal Reserve, EUR/USD may continue to face range-bound prices over the near-term as it fails to break out of the monthly opening range.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 19, with the ratio approaching extremes as it slips to -2.43.
  • Interim Resistance: 1.1510 (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)

APR

2015

05/22/2015

12:30 GMT

-0.2%

-0.2%

-144

-165

March 2015 U.S. Consumer Price Index

EUR/USD Chart

The U.S. Consumer Price Index (CPI) contracted an annualized 0.2% in April, while the core rate of inflation unexpectedly held steady at 1.8% amid forecasts for a 1.7% print. The stickiness the core CPI may keep the Fed on course to remove the zero-interest rate policy (ZIRP) later this year, but fears of a slower recovery may spark a further delay in the normalization cycle as the central bank largely remains ‘data dependent.’ The greenback strengthened following the release, with EUR/USD dipping below 1.1050 to end the session at 1.1008.

--- 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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