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EUR/USD August Rebound at Risk on Upbeat U.S. CPI Report

EUR/USD August Rebound at Risk on Upbeat U.S. CPI Report

2015-08-19 08:00:00
David Song, Shuyang Ren,
Share:

- Headline U.S. Consumer Price Index (CPI) to Rise for Second-Consecutive Month in July.

- Core Rate of Inflation to Hold Steady at Annualized 1.8%- Highest Print for 2015.

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

Another uptick in the U.S. Consumer Price Index (CPI) may spark a sell-off in EUR/USD as market participants ramp up bets for a Fed rate hike at the September 17 interest rate decision.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Data prints highlighting stronger price growth may spur a greater dissent with the Federal Open Market Committee (FOMC) as the economy approaches full-employment, and the central bank may sound more hawkish over the coming months as it anticipates a stronger recovery to emerge over the remainder of the year.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

0.5%

0.6%

Advance Retail Sales (MoM) (JUL)

0.6%

0.6%

Personal Spending (JUN)

0.2%

0.2%

Higher input costs along with the pickup in private-sector consumption may encourage U.S. firms to boost consumer prices, and a strong CPI print may generate a bullish reaction in the greenback as it fuels bets for higher borrowing-costs.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (AUG P)

93.5

92.9

Average Hourly Earnings (YoY) (JUL)

2.3%

2.1%

Consumer Confidence (JUL)

100.0

90.9

However, businesses may continue offer discounted prices amid waning confidence paired with the ongoing weakness in household earnings, and a dismal inflation report may spur a further delay of the Fed’s normalization cycle especially as the Fed struggles to achieve the 2% target for price growth.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. CPI Climbs Annualized 0.2% 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: Price Growth Falls Short of Market Forecast

  • 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 Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • With EUR/USD carving out a recent series of lower highs & lows, the pair remains at risk of giving back the rebound from earlier this month should the Relative Strength Index (RSI) fail to preserve the bullish momentum carried over from July.
  • 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 recent extremes as it narrows to -1.59, with 39% 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)

Read More:

GBP/USD Breaks Out Following Strong CPI- Retail FX Crowd Flips Short

Scalping NZDUSD Opening Range- 6630 Resistance Remains Key Hurdle

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)

JUN

2015

07/17/2015

12:30 GMT

0.1%

0.1%

-18

-57

June 2015 U.S. Consumer Price Index

EUR/USD August Rebound at Risk on Upbeat U.S. CPI Report

The U.S. Consumer Price Index (CPI) climbed an annualized 0.1% in June after holding flat the month prior, while the core rate of inflation was largely in-line with market expectation as the reading increased to 1.8% from 1.7% during the same period. The pickup was largely driven a 1.7% rise in energy prices, with Transportation costs advancing 1.0%, while prices for Apparel slipped another 0.1% after contracting 0.5% in May. Stabilizing oil prices paired with easing discounts may highlight an improved outlook for inflation, but the Fed remains at risk of further delaying its normalization cycle as the central bank struggles to achieve the 2% target for price growth. The greenback strengthened following the CPI report, with EURUSD dipping below the 1.0870 region to close the day at 1.0827.

--- 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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