EUR/USD Rebound on Dovish Fed at Risk on Strong U.S. CPI
- 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.
For more updates, sign up for David's e-mail distribution list.
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.
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
|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
|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.
Join DailyFX on Demand for Real-Time SSI Updates Across the Majors!
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
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)
Impact that US CPI has had on EUR/USD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
March 2015 U.S. Consumer Price Index
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 email@example.com. Follow me on Twitter at @DavidJSong.
To be added to David's e-mail distribution list, please follow this link.
Trade Alongsidethe DailyFX Team on DailyFX on Demand
Looking to use the DailyFX Trade Signals LIVE? Check out Mirror Trader.
New to FX? Watch this Video
Join us to discuss the outlook for the major currencies on the DailyFXForums
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.