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Euro-Zone CPI to Spark EUR/USD Rebound on Sticky Inflation

Euro-Zone CPI to Spark EUR/USD Rebound on Sticky Inflation

David Song, Shuyang Ren,

- 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.

What’s Expected:

EUR/USD CPI

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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

ReleaseExpectedActual
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

ReleaseExpectedActual
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.

Read More:

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Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

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

PeriodData ReleasedEstimateActualPips ChangePips Change

JUN

2015

06/30/2015 09:00 GMT0.2%0.2%+450

June 2015 Euro-Zone Consumer Price Index (CPI)

EUR/USD Chart

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

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

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