- U.S. Consumer Price Index (CPI) to Hold Steady at Annualized 1.1% for Second-Month.

- Core Rate of Inflation to Uptick for First Time in Three-Months.

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

Even though the U.S. Consumer Price Index (CPI) is expected to hold steady at an annualized 1.1% in May, an uptick in the core rate of inflation may prop up the greenback and spark a near-term pullback in EUR/USD as it puts greater pressure on the Federal Open Market Committee (FOMC) to further normalize monetary policy sooner rather than later.

What’s Expected:

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Why Is This Event Important:

Even though the FOMC votes unanimously to retain its current policy in June, heightening price pressures may push the central bank to implement higher borrowing-costs over the coming months as it runs the risk of overshooting the 2% inflation-target over the policy horizon.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (MAY)

0.3%

0.5%

NFIB Small Business Optimism (MAY)

93.6

93.8

Personal Spending (APR)

0.7%

1.0%

Improved business confidence accompanied by the pickup in household spending may boost consumer prices, and heightening price pressures may spark a bullish reaction in the greenback as it puts increased pressure on the Fed to further normalize monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Producer Price Index (YoY) (MAY)

-0.1%

-0.1%

Consumer Credit (APR)

$18.000B

$13.416B

Gross Domestic Product (Annualized) (1Q P)

0.9%

0.8%

Nevertheless, U.S. firms may offer discounted prices amid the slowdown in private-sector lending paired with signs of a slower-than-expected recovery, and a dismal inflation report may drag on the greenback as market participants push out bets for the next Fed rate-hike.

How To Trade This Event Risk(Video)

Bullish USD Trade: Core Rate of Inflation Advances 2.2% or Greater

  • 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.

Bearish USD Trade: U.S. CPI Report Fails to Meet Market Expectations

  • 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
  • Even though EUR/USD remains stuck within a narrow range, the bullish trend from earlier this year may reassert itself over the coming days as the pair appears to be carving a higher-low in June, with a break above the monthly high (1.1414) raising the risk for a run at the 2016 high (1.1615).
  • Key Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Key Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

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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)

APR 2016

05/17/2015 12:30 GMT

1.1%

1.1%

+16

-6

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

EUR/USD Chart

The U.S. Consumer Price Index (CPI) increased an annualized 1.1% in April following the 0.9% expansion the month prior, while the core rate of inflation narrowed to 2.1% from 2.2% during the same period. A deeper look at the report showed transportation costs climbing another 0.7% on the back of higher energy prices, which was accompanied by a 0.2% rise in food costs, while prices for apparel slipped 0.3% in April. The U.S. dollar struggled to hold its ground following the slowdown in core inflation, with EUR/USD bouncing back from the 1.1300 handle to end the day at 1.1309.

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Read More:

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US DOLLAR Technical Analysis: A Wild Open To June Is Set To Get Wilder

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NZD/USD: RBNZ Breakout Approaching Initial Resistance Targets

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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