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EUR/USD Strength to Persist on Dismal U.S. CPI Report- 1.1500 on Tap?

EUR/USD Strength to Persist on Dismal U.S. CPI Report- 1.1500 on Tap?

David Song, Shuyang Ren,

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

- Core Rate of Inflation to Hold Steady at Annualized 1.8% for Fourth Consecutive Month.

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

Despite forecasts for a 0.1% contraction in the U.S. Consumer Price Index (CPI), stickiness in the core rate of inflation may keep the Fed on course to normalize monetary policy in 2015 as Chair Janet Yellen remains upbeat on the economy.

What’s Expected:

EUR/USD U.S. CPI

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Why Is This Event Important:

Stable price growth may heighten the appeal of the greenback as the Fed remains confident in achieving the 2% inflation target over the policy horizon, but signs of softening price pressures may spur additional headwinds for the greenback as market participants push back bets for a rate-hike.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

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

1.2%

0.8%

Advance Retail Sales (MoM) (SEP)

0.2%

0.1%

Wholesale Trade Sales (MoM) (AUG)

-0.4%

-1.0%

Easing factor-gate prices accompanied by the slowdown in household consumption may encourage U.S. firms to offer discounted prices, and a dismal CPI print may prompt the Federal Open Market Committee (FOMC) to carry its zero-interest rate policy (ZIRP) into 2016 in an effort to curb the downside risks surrounding the real economy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

NFIB Small Business Optimism (SEP)

95.5

96.1

Consumer Confidence (SEP)

96.8

103.0

Gross Domestic Product (Annualized) (QoQ) (2Q F)

3.7%

3.9%

Nevertheless, improved confidence paired with the pickup in second-quarter GDP may generate stable price growth in the U.S. economy, and a positive development may spur a near-term recovery in the dollar as it boosts interest rate expectations.

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How To Trade This Event Risk(Video)

Bearish USD Trade: Headline & Core U.S. CPI Disappoints

  • Need to see green, five-minute candle following the release to consider a long trade on EUR/USD.
  • If market reaction favors a bearish dollar 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.

Bullish USD Trade: Sticky Price Growth Boosts Rate Expectations

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

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • With the Relative Strength Index (RSI) largely preserving the bullish formation from back in March, EUR/USD may continue to retrace the decline from the August high (1.1713) as the ongoing mixed batch of data coming out of the U.S. economy drags on interest rate expectations.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio continues to work its way back towards recent extremes as it slips to -2.13, with 32% 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)

Read More:

Price & Time: Make or Break Time For US Dollar

WTI Crude Oil Price Forecast: Oil Set To Gush on Break of 200 DMA

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)

AUG

2015

09/16/2015

12:30 GMT

0.2%

0.2%

+37

+53

August 2015 U.S. Consumer Price Index

EUR/USD Chart

As expected, the U.S. Consumer Price Index (CPI) increased an annualized 0.2% in August, while the core rate of inflation held steady at 1.8% amid forecasts for a 1.9% print. A deeper look at the report showed costs for apparel increasing another 0.3% in August, with food and beverage costs increasing 0.2%, while transportation costs slipped 1.3% after holding flat during the previous month. The greenback struggled to hold its ground following the weaker-than-expected release, with EUR/USD climbing above the 1.1250 region to close the North American session at 1.1288.

--- 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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