Euro-Zone CPI to Spark EUR/USD Rebound on Sticky Inflation
- Euro-Zone Consumer Price Index (CPI) to Expand Another 0.2% in July.
- Core Inflation to Hold Steady at Annualized 0.8% for Second Consecutive Month.
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Trading the News: Euro-Zone Consumer Price Index (CPI)
The Euro-Zone’s Consumer Price Index (CPI) may spur a bullish reaction in EUR/USD as sticky price growth in the monetary union dampens the European Central Bank’s (ECB) scope to implement more non-standard measures.
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Why Is This Event Important:
Even though the ECB retains its pledge to ‘fully implement’ its quantitative easing (QE) program, the diminishing threat for deflation may encourage central bank President Mario Draghi to adopt a more upbeat tone over the coming months, and the Governing Council may start to discuss a potential exit strategy going into 2016 amid signs of a more sustainable recovery in the euro-area.
Expectations: Bullish Argument/Scenario
|M3 Money Supply (3M) (JUN)||5.1%||5.1%|
|Retail Sales (MoM) (MAY)||0.1%||0.2%|
|Construction Output (MoM) (MAY)||--||0.3%|
Increased consumption paired with the pickup in private-sector credit may encourage faster price growth across the euro-area, and an unexpected expansion in the CPI may heighten the appeal of the single currency as the region gets on a more sustainable path.
Risk: Bearish Argument/Scenario
|Consumer Confidence (JUL A)||-5.8||-7.1|
|Producer Price Index (YoY) (MAY)||-2.0%||-2.0%|
|Unemployment Rate (MAY)||11.1%||11.1%|
However, European firms may continue to offer discounted prices amid high unemployment along with lower input costs, and a dismal inflation report may produce further headwinds for the euro as the ECB retains a very dovish outlook for monetary policy.
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How To Trade This Event Risk(Video)
Bullish EUR Trade: CPI Highlights Sticky Price Growth
- Need green, five-minute candle following the release to consider a long EUR/USD trade.
- If market reaction favors a bullish Euro 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.
Bearish EUR Trade: Euro-Zone Inflation Exceeds Market Forecast
- Need red, five-minute candle to favor a short EUR/USD trade.
- Implement same setup as the bullish Euro trade, just in opposite direction.
Potential Price Targets For The Release
Chart - Created Using FXCM Marketscope 2.0
- Failure to hold above the Fibonacci overlap around 1.0970 (38.2% expansion) to 1.0990 (50% retracement) raises the risk for a further decline in EUR/USD as the pair continues to search for support, with the July low (1.0807) on the radar.
- DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio continues to narrow ahead of August as it sits at -1.43, with 41% of traders long.
- 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)
Impact that the Euro-Zone CPI report has had on EUR during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|06/30/2015 09:00 GMT||0.2%||0.2%||+45||0|
June 2015 Euro-Zone Consumer Price Index (CPI)
The Euro-Zone’s Consumer Price Index (CPI) slowed to an annualized rate of 0.2% in June from 0.3% the month prior, while the core rate of inflation also matched market expectations as it slipped to 0.8% from 0.9% during the same period. Despite the slowdown, it looks as though the monetary union is largely moving away from a disinflationary environment after facing negative price growth earlier this year, and the Europe Central Bank (ECB) may turn increasingly upbeat towards the economy as President Mario Draghi sees a moderate recovery in the euro-area. The Euro bounced back following the in-line prints, with EUR/USD working its way above the 1.1200 handle, but the pair struggled to holds its ground during the North American trade as it closed the day at 1.1140
--- Written by David Song, Currency Analyst and Shuyang Ren
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