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EUR/USD Risks Near-Term Pullback on Higher U.S. Core Inflation

EUR/USD Risks Near-Term Pullback on Higher U.S. Core Inflation

David Song, Strategist

- 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.

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

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:

DailyFX Calendar

Click Here for the DailyFX Calendar

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)

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)

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.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Confluence of Technical Events Bolsters Case for the Bears

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

DailyFX Technical Focus: Flying Kiwi

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.

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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