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EUR/USD to Mount Larger Rebound on Slowing U.S. Core CPI

EUR/USD to Mount Larger Rebound on Slowing U.S. Core CPI

David Song, Strategist

- U.S. Consumer Price Index (CPI) to Rebound to Annualized 1.1% in April.

- Core Rate of Inflation Expected to Slow for Second-Consecutive Month.

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

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

Despite forecasts for a rebound in the U.S. Consumer Price Index (CPI), another slowdown in the core rate of inflation may dampen the appeal of the greenback and spark a near-term advance in EUR/USD as it drags on interest-rate expectations.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though Fed officials see scope for two rate-hikes in 2016, signs of a slower-than-expected recovery may push the Federal Open Market Committee (FOMC) to further delay the normalization cycle amid the external risks surrounding the real economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (APR)

200K

160K

ADP Employment (APR)

195K

156K

Gross Domestic Product (Annualized) (QoQ) (1Q A)

0.7%

0.5%

Easing job growth accompanied by signs of a slowing recovery may push U.S. firms to offer discounted prices, and a softer-than-expected CPI report may weigh on the greenback as market participants push out bets for the next Fed rate-hike.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (ARP)

0.8%

1.3%

Personal Income (MAR)

0.3%

0.4%

Average Hourly Earnings (YoY) (APR)

2.4%

2.4%

However, stronger wage growth paired with the rebound in private-sector spending may boost consumer prices, and a pickup in the headline & core rate of inflation may spur a bullish reaction in the U.S. dollar as it puts increased pressure on the Fed to implement higher borrowing-costs.

How To Trade This Event Risk(Video)

Bearish USD Trade: Core Rate of Inflation Narrows to 2.1% or Lower

  • Need green, five-minute candle following the print to consider a long position 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: U.S. CPI Report Exceeds Market Forecast

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

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Following the failed attempt to test the August high (1.1713), EUR/USD may continue to give back the advance from the previous month as it remains stuck in a descending channel formation, with a near-term hurdle coming in around 1.1210 (61.8% retracement) to 1.1230 (38.2% retracement).
  • Interim Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • 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 USD/CADheading 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 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)

MAR 2016

04/14/2015 12:30 GMT

1.0%

0.9%

+22

+13

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

EUR/USD Chart

The U.S. Consumer Price Index (CPI) unexpectedly narrowed in March, with the headline reading slipping to an annualized 0.9% from 1.0% the month prior, with the core rate of inflation following suit as the figure slowed to 2.2% from 2.3% during the same period. A deeper look at the report showed a 1.1% decline in prices for apparel, which was accompanied by a 0.2% drop in prices for food/beverages, while transportation costs increased 0.4% as energy prices climbed 0.9%. The greenback struggled to hold its ground following the weaker-than-expected CPI report, with EUR/USD advancing from the 1.1250 region to end the day at 1.1265.

Get our top trading opportunities of 2016 HERE

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Read More:

Record Trend Following Long Position in Gold

AUD/CAD Into Key Support- Monthly Opening Range In Focus

US Dollar Bear Trap within an Even Bigger Bull Trap?!

USD/JPY Technical Analysis: Has It Bottomed?

--- 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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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