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Sticky Core U.S. CPI to Cap EUR/USD Advance

Sticky Core U.S. CPI to Cap EUR/USD Advance

David Song, Strategist

- U.S. Consumer Price Index (CPI) to Narrow for Fourth Time in 2016.

- Core Rate of Inflation to Hold Steady at Annualized 2.3%- Fastest Pace of Growth Since 2012.

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

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

Despite forecasts for a downtick in the U.S. Consumer Price Index (CPI), stickiness in the core rate of inflation may boost the appeal of the greenback and spark a near-term pullback in EUR/USD as it puts pressure on the Federal Reserve to raise the benchmark interest rate sooner rather than later.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The growing risk of overshooting the 2% inflation-target may spur a larger dissent within Federal Open Market Committee (FOMC), and we may see a growing number of central bank officials push for a 2016 rate-hike especially as the U.S. economy approaches ‘full-employment.’ However, Chair Janet Yellen may try to buy more time at the next quarterly meeting in September as the central bank reiterates ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (AUG P)

91.5

90.4

Advance Retail Sales (MoM) (JUL)

0.4%

0.0%

Producer Price Index ex Food & Energy (YoY) (JULL)

1.2%

0.7%

Easing input costs paired with the slowdown in private-sector consumption may drag on consumer prices, and signs of waning price growth may weigh on the greenback as market participants push out bets for the next Fed rate-hike.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

NFIB Small Business Optimism (JUL)

94.5

94.6

Non-Farm Payrolls (JUL)

180K

255K

Core Personal Consumption Expenditure (2Q A)

1.7%

1.7%

Nevertheless, the pickup in business confidence accompanied by the ongoing improvement in the labor market may generate a positive development, and a strong inflation report may spark a bullish reaction in the U.S. dollar as it fuels interest-rate expectations.

How To Trade This Event Risk(Video)

Bearish USD Trade: Headline & Core Inflation Narrow in July

  • 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.

Bullish USD Trade: U.S. Consumer Price Report Exceeds Market Forecast

  • Need red, five-minute candle to favor a short EUR/USD trade.
  • Implement same setup as the bearish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart
  • EUR/USD may further retrace the decline from the May high (1.1615) as the pair appears to be breaking out of the wedge/triangle formation carried over from June, with a break of the 100-Day SMA (1.1226) opening up the next topside hurdle around 1.1270 (38.2% retracement) to 1.1290 (23.6% 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 EUR/USD 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)

JUN 2016

07/15/2016 12:30 GMT

1.1%

1.0%

-58

-103

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

EUR/USD 5-Minute

EUR/USD Chart

The U.S. Consumer Price Index (CPI) held steady at an annualized 1.0% for the second consecutive month in June, while the core rate of inflation unexpectedly picked up to 2.3% from 2.2% during the same period to match the fastest rate of growth for 2016. A deeper look at the report showed prices for apparel slipped 0.4% in June, with food costs narrowing 0.1%, while transportation costs increased 0.6%, which was accompanied by a 1.3% rise in energy prices. EUR/USD slipped below the 1.1100 as the slew of U.S. data prints showed Retail Sales expanding 0.6% in June, with the pair struggling to hold its ground throughout the day as it closed at 1.1028.

Get our top trading opportunities of 2016 HERE

Read More:

USD/CAD Technical Analysis: Macro Now Favoring a Breakdown?

Gold Prices Wedging into Consolidation Near Resistance

USDOLLAR Short Term Technical Update

S&P 500: Notches New Record High, Short-term Techs in Focus

--- 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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