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Sticky Euro-Zone CPI to Fuel EUR/USD Rebound

Sticky Euro-Zone CPI to Fuel EUR/USD Rebound

2015-09-30 05:00:00
David Song, Shuyang Ren,
Share:

- Euro-Zone Consumer Price Index (CPI) to Hold Flat in September.

- Core Inflation to Hold Steady at Annualized 0.9% for Second Straight Month.

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

Trading the News: Euro-Zone Consumer Price Index (CPI)

A slowdown in the Euro-Zone’s Consumer Price Index (CPI) may drag on the Euro and spark a short-term decline in EUR/USD as it puts increased pressure on the European Central Bank (ECB) to further embark on its easing cycle.

What’s Expected:

EUR/USD Euro-Zone CPI

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Why Is This Event Important:

Even though the ECB keeps the door open to expand the scope as well as the duration of its quantitative easing (QE) program, stickiness in the core rate of inflation may encourage the Governing Council to endorse a wait-and-see approach at the October 22 as central bank President Mario Draghi anticipates price growth to pick up towards the end of the year.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (SEP A)

-7.0

-7.1

Retail Sales (MoM) (JUL)

0.5%

0.4%

Producer Price Index (YoY) (JUL)

-2.1%

2.1%

Lower input costs paired with the ongoing slack in private-sector consumption may encourage European firms to offer discounted prices, and a dismal CPI print may spur a bearish reaction in the Euro as it fuels speculation for additional monetary support.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Business Climate Indicator (SEP)

0.21

0.34

Employment (QoQ) (2Q)

--

0.3%

Gross Domestic Product s.a. (QoQ) (2Q P)

0.3%

0.4%

However, improved confidence accompanied by the stronger-than-expected GDP figures may foster a stronger-than-expected inflation report, and sticky price growth in the euro-area may keep the ECB on the sidelines throughout 2015 as the central bank continues to assess the impact of its non-standard measures.

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How To Trade This Event Risk(Video)

Bearish EUR Trade: Euro-Zone CPI Boosts Bets for Larger ECB QE Program

  • Need red, five-minute candle following the release to consider a short EUR/USD trade.
  • If market reaction favors a bearish Euro 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.

Bullish EUR Trade: Headline & Core Inflation Exceed Market Forecast

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same setup as the bearish Euro trade, just in opposite direction.

Read More:

Scalping EURUSD Ahead of NFP- Long Bias Favored Above 1.12

GBP/USD May Low (1.5088) on the Radar Ahead of BoE Carney Speech

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though the deviation paths for monetary policy favors a long-term bearish outlook for EUR/USD, the pair may trade on a firmer footing over the near-term as market participants treat the Euro as a ‘funding-currency,’ while the Relative Strength Index (RSI) retains the bullish formation carried over from March.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio remains off of recent extremes as it sits at –1.49, with 40% of traders long.
  • Interim Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Interim Support: 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

(1 Hour post event )

Pips Change

(End of Day post event)

AUG

2015

08/31/2015 09:00 GMT

0.1%

0.2%

+4

+9

August 2015 Euro-Zone Consumer Price Index (CPI)

EUR/USD Chart

The Euro-Zone’s Consumer Price Index (CPI) beat market expectations as the headline reading increased another 0.2% in August, while the core rate of inflation grew 1.0% amid forecasts for a 0.9% clip. Despite the better-than-expected prints, the European Central Bank (ECB) may have little choice but to further embark on its cycle as the resilience in the Euro exchange rate accompanied by weaker energy prices undermines the central bank’s scope to achieve its one and only mandate for price stability. Nevertheless, the market reaction was largely limited, with EUR/USD edging below the 1.1200 handle following the release, but the pair consolidated throughout the North American trade to end the day at 1.1208.

--- 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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