EUR/USD Risks Near-Term Pullback on Higher U.S. Core Inflation
- 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.
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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
|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
|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
- 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||Pips Change|
|APR 2016||05/17/2015 12:30 GMT||1.1%||1.1%||+16||-6|
April 2016 U.S. Consumer Price Index (CPI)
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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--- Written by David Song, Currency Analyst
To contact David, e-mail firstname.lastname@example.org. Follow me on Twitter at @DavidJSong.
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