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EUR/USD Weakness to Persist on Sticky U.S. Consumer Price Index (CPI)

EUR/USD Weakness to Persist on Sticky U.S. Consumer Price Index (CPI)

2016-04-14 08:00:00
David Song, Currency Strategist
Share:

- U.S. Consumer Price Index (CPI) to Rebound to Annualized 1.0% in March.

- Core Rate of Inflation to Hold Steady at 2.3% for Second-Month; Highest Since May 2012.

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Trading the News: U.S. Consumer Price Index

A pickup in the U.S. Consumer Price Index (CPI) accompanied by stickiness in the core rate of inflation may boost the appeal of the greenback and spark a further decline in EUR/USD as it boosts interest-rate expectations.

What’s Expected:

DailyFX Calendar U.S. CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the Federal Open Market Committee (FOMC) appears to be in no rush to implement higher borrowing-costs, stronger price growth may put increased pressure on the central bank to further normalize monetary policy especially as the U.S. economy approaches ‘full-employment.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (FEB)

$14.900B

$17.217B

Average Hourly Earnings (YoY) (MAR)

2.2%

2.3%

Personal Income (FEB)

0.1%

0.2%

Signs of stronger wage growth paired with the expansion in private-sector lending may encourage U.S. firms to boost consumer prices, and a strong CPI reading may spark a bullish reaction in the greenback as it fuels speculation for higher interest rates.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MAR)

0.1%

-0.3%

Producer Price Index (YoY) (MAR)

0.3%

-0.1%

NFIB Small Business Optimism (MAR)

93.5

92.6

Nevertheless, waning confidence along with the slowdown in household spending may drag on price growth, and a softer-than-expected inflation report may weigh on the dollar as it increases the Fed’s scope to further delay its normalization cycle.

How To Trade This Event Risk(Video)

Bullish USD Trade: CPI Report Highlights Sticky U.S. Price Growth

  • Need red, five-minute candle following the print 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: Headline & Core Rate of Inflation Fail to Meet Market Forecast

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same setup as the bullish 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

  • EUR/USD stands at risk for a larger pullback as the Relative Strength Index (RSI) fails to preserve the bullish formation carried over from February, with the next key downside region of interest coming in around 1.1090 (50% retracement) to 1.1110 (50% retracement).
  • Interim Resistance: 1.1510 (50% retracement) to 1.1520 (61.8% expansion)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Check out the short-term technical levels that matter for USDOLLAR heading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

Impact that the U.S. Consumer Price Index report has had on EUR/USD during the previous month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB 2016

03/16/2015 12:30 GMT

0.9%

1.0%

-27

+126

February 2016 U.S. Consumer Price Index (CPI)

EUR/USD Chart

The U.S. Consumer Price Index (CPI) narrowed to an annualized 1.0% from 1.4% in February, while the core rate of inflation unexpectedly advanced to 2.3% from 2.2% during the same period to mark the highest reading since May 2012. A deeper look at the report showed prices for apparel increased 1.6% in February to lead the advance, with the cost of medical care increasing another 0.5%, while transportation costs slipped another 2.5% after contracting 0.8% in January. EUR/USD tracked lower following the report, with the pair slipping to a session low of 1.1057, but the fresh developments from the Federal Reserve interest-rate decision sparked a meaningful advance in the exchange rate as the euro-dollar ended the day at 1.1222.

Read More:

EUR/USD – Shaken, Not Stirred

Near-term Setups in EURAUD, GBPUSD, AUDJPY & CADJPY

US DOLLAR Technical Analysis: Has Anyone Seen The Bulls?

AUD/USD Weekly Tweezer Top; Cycle Influence Next Week

Get our top trading opportunities of 2016 HERE

--- Written by David Song, Currency Analyst

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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