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EUR/USD to Eye May Low on Strong U.S. Consumer Price Index (CPI)

EUR/USD to Eye May Low on Strong U.S. Consumer Price Index (CPI)

David Song, Shuyang Ren,

- Headline U.S. Consumer Price Index (CPI) to Rise for First Time in 2015.

- Core Rate of Inflation to Climb to Annualized 1.8% to Mark First Uptick Since March.

For more updates, sign up for David's e-mail distribution list.

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

A meaningful pickup in the U.S. Consumer Price Index (CPI) may boost the appeal of the greenback and spur fresh monthly lows in EUR/USD as it fuels speculation for a Fed rate hike in 2015.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of stronger price growth may encourage the Fed to adopt a more hawkish tone for monetary policy, and we may see a growing number of central bank officials show a greater willingness to remove the zero-interest rate policy (ZIRP) later this year as Chair Janet Yellen remains confident in achieving the 2% target for inflation over the policy horizon.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

0.1%

0.3%

Unemployment Rate (JUN)

5..4%

5.3%

ADP Employment Change (JUN)

218K

237K

Rising input costs along with the ongoing improvement in the labor market may push U.S. firms to raise consumer prices, and a strong inflation report may heighten the bullish sentiment surrounding the dollar as the Fed remains on course to normalize monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Philadelphia Fed Business Outlook Survey (JUL)

12.0

5.7

Advance Retail Sales (MoM) (JUN)

0.3%

-0.3%

NFIB Small Business Optimism (JUN)

98.5

94.1

However, waning business confidence paired with the weakness in private-sector consumption may continue to drag on price growth, and a dismal CPI print may generate a near-term rebound in EUR/USD as it drags on interest rate expectations.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. Headline & Core CPI Picks Up in June

  • 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 Inflation Falls Short of Market Expectations

  • 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 to Eye May Low on Strong U.S. Consumer Price Index (CPI)

Chart - Created Using FXCM Marketscope 2.0

  • May see a run at the May low (1.0818) as EUR/USD fails to retain the range-bound price action carried over from the previous week; even though the long-term outlook remains bearish, the euro-dollar may continue to consolidate over the near to medium-term as it retains the wedge/triangle formation from earlier this year.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio continues to come off of extremes as it narrows to -1.11.
  • Interim Resistance: 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement)
  • Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% expansion)

Read More:

Price & Time: 6-Year High In USD/CAD

Key EURUSD Levels to Know Ahead of the ECB, US CPI

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)

May

2015

06/18/2015

12:30 GMT

0.1%

0.0%

+11

-31

May 2015 U.S. Consumer Price Index

EUR/USD to Eye May Low on Strong U.S. Consumer Price Index (CPI)

The U.S. Consumer Price Index (CPI) continued to fall short of market expectations as the headline print held flat from the previous year after contracting an annualized 0.1% the month prior. At the same time, the core rate of inflation slowed to an annualized rate of 1.7% after climbing 1.8% during the previous month. Despite the ongoing weakness in price growth, it seems as though the Fed will stay on course to normalize monetary policy in 2015 as Chair Janet Yellen retains an upbeat outlook for the economy and remains confident in attaining the 2% inflation target over the policy horizon. The initial market reaction was short-lived, with EUR/USD quickly snapping back from 1.1425, and the pair largely struggled to hold its ground throughout the day as it closed the session at 1.1362.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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