EUR/USD to Mount Larger Advance on Soft U.S. Core CPI
- 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.
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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.
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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
|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
|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
- 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!
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Impact that the U.S. Consumer Price Index has had on EUR/USD during the previous release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|MAY 2016||06/16/2016 12:30 GMT||1.1%||1.0%||-16||+46|
May 2016 U.S. Consumer Price Index (CPI)
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.
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--- Written by David Song, Currency Analyst
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