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EUR/USD to Mount Larger Advance on Soft U.S. Core CPI

EUR/USD to Mount Larger Advance on Soft U.S. Core CPI

David Song, Strategist

- U.S. Consumer Price Index (CPI) to Climb Annualized 1.1% to Mark Third Advance for 2016.

- Core Rate of Inflation to Hold Steady at 2.2% for Second Month.

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 projected to increase an annualized 1.1% in June, another 2.2% print for the core rate of inflation may drag on the greenback and spark a near-term advance in EUR/USD as it raises the Fed’s scope to further delay the normalization cycle.

What’s Expected:

DailyFX Calendar

Click Here for the DailyFX Calendar

Why Is This Event Important:

The Federal Open Market Committee (FOMC) may retain its current policy at the next interest-rate decision on July 27 as the central bank warns market-based measures of inflation compensation remain weak while ‘most survey-based measures of longer-term inflation expectations are little changed,’ and the central bank may continue to endorse a wait-and-see approach at the next as Fed officials appear to be in no rush to implement higher borrowing-costs.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Producer Price Index ex. Food & Energy (YoY) (JUN)

1.0%

1.3%

NFIB Small Business Optimism (JUN)

93.9

94.5

Advance Retail Sales (MAY)

0.3%

0.5%

Rising input costs accompanied by the pickup in private-sector consumption may boost consumer prices, and signs of stronger inflation may spark a bullish reaction in the U.S. dollar as it puts increased pressure on the FOMC to raise the benchmark interest rate in 2016.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (MAY)

-$40.0B

-$41.1B

Average Hourly Earnings (YoY) (JUN)

2.7%

2.6%

Personal Income (MAY)

0.3%

0.2%

Nevertheless, subdued wage growth paired with the weakening outlook for global growth may encourage U.S. firms to offer discounted prices, and a softer-than-expected inflation report may produce headwinds for the greenback as market participants push out bets for the next Fed rate-hike.

How To Trade This Event Risk(Video)

Bullish USD Trade: Headline & Core Rate of Inflation Advance in June

  • Need red, five-minute candle following the print to consider a short position on EUR/USD.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/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 Disappoints

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

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart
  • Longer-term outlook for EUR/USD is tilted to the downside as the pair fails to preserve the upward trend from back in December, but the euro-dollar may mount a larger rebound amid the failed attempts to close below the Fibonacci overlap around 1.0960 (23.6% retracement) to 1.0970 (38.2% retracement).
  • 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)

Check out the short-term technical levels that matter for USD/CHF heading 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 Index has had on EUR/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2016

06/16/2016 12:30 GMT

1.1%

1.0%

-16

+46

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

EUR/USD 5-Minute

EUR/USD Chart

The U.S. Consumer Price Index (CPI) unexpectedly slowed to an annualized 1.0% from 1.1% in April, while the core rate of inflation advanced to 2.2% from 2.1% during the same period. A deeper look at the report showed Transportation costs increasing another 0.4% in May, with prices for Apparel advancing 0.8%, while food/beverage costs narrowed 0.2% after climbing 0.2% in April. The initial market reaction was short-lived, with EUR/USD slipping below the 1.1150 region, but the greenback struggled to hold its ground throughout the day, with the pair closing at 1.1223.

Get our top trading opportunities of 2016 HERE

Read More:

DAX: Upside Carnage Continues, Major Price Zone Next Stop

WTI Crude Oil Price Forecast: Bearish Price Channel Favors Downside Bias

COT-Unchartered Waters for Gold and Silver Positioning

USD/CAD is Fertile Ground; Watch Daily 8-EMA in GBP-crosses

--- 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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