EUR/USD to Give Back June Advance on Higher U.S. Income, Sticky PCE
- 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. Personal Consumption Expenditure (PCE)
Sticky inflation along with a pickup in Personal Income & Spending may heighten demand for the greenback and trigger a near-term decline for EUR/USD as it boosts bets for Fed rate hike in September.
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Why Is This Event Important:
Positive developments coming out of the world’s largest economy may keep the Federal Open Market Committee (FOMC) on course to normalize monetary policy later this year, and we may see a growing number of central bank officials adopt a more hawkish tone on the back of a stronger recovery.
Expectations: Bullish Argument/Scenario
|Advance Retail Sales (MoM) (MAY)||1.2%||1.2%|
|Average Hourly Earnings (YoY) (MAY)||2.2%||2.3%|
|Non-Farm Payrolls (MAY)||226K||280K|
The ongoing improvement in the labor market paired with the pickup in household consumption may generate a slew of better-than-expected data prints, and the dollar may continue to recoup the losses from earlier this month should the developments fuel bets for higher borrowing-costs.
Risk: Bearish Argument/Scenario
|Consumer Price Index ex Food & Energy (YoY) (MAY)||1.8%||1.7%|
|Housing Starts (MoM) (MAY)||-4.0%||-11.1%|
|Producer Price Index ex Food & Energy (YoY) (MAY)||0.7%||0.6%|
However, the persistent lack in the real economy accompanied with the disinflationary environment may become a growing concern for the Fed, and signs of a slower recovery may drag on interest rate expectations as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy (ZIRP).
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How To Trade This Event Risk(Video)
Bullish USD Trade: U.S. Income/PCE Highlight Improved Outlook for Growth & Inflation
- 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: Mixed Batch of Data Warns of Slower Recovery
- 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 Personal Consumption Expenditure has had on EUR/USD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
April 2015 U.S. Personal Consumption Expenditure (PCE)
The core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, unexpected slowed to an annualized 1.2% from 1.3% in April, while Personal Spending remained flat following a revised 0.5% advance the month prior. In contrast, Personal Income exceeded market forecasts for a 0.3% print as wage growth increased 0.4% during the same period. Nevertheless, the mixed batch of data prints coming out of the U.S. economy raises the risk for a further delay in the Fed’s normalization cycle as the developments point to a slowing recovery. The greenback struggled to hold its ground following the data prints, but the reserve currency snapped back during the North American trade, with EUR/USD slipping below the 1.0950 region to end the day at 1.0923.
--- Written by David Song, Currency Analyst and Shuyang Ren
To contact David, e-mail firstname.lastname@example.org. Follow me on Twitter at @DavidJSong.
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