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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

- 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.

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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

ReleaseExpectedActual
Non-Farm Payrolls (APR)200K160K
ADP Employment (APR)195K156K
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

ReleaseExpectedActual
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/CAD heading into the report!

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

PeriodData ReleasedEstimateActualPips ChangePips Change
MAR 201604/14/2015 12:30 GMT1.0%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.

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Read More:

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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.

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

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