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Strong U.S. Consumer Price Index (CPI) to Tame EUR/USD Resilience

Strong U.S. Consumer Price Index (CPI) to Tame EUR/USD Resilience

David Song, Strategist

- U.S. Consumer Price Index (CPI) to Pick Up for First Time Since April.

- Core Rate of Inflation to Hold Steady at Annualized 2.2%.

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

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

A pickup in the U.S. Consumer Price Index (CPI) may boost the appeal of the greenback and spark a near-term decline in EUR/USD should the report put pressure on the Federal Open Market Committee (FOMC) to raise the benchmark interest rate sooner rather than later.

What’s Expected:

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Why Is This Event Important:

Even though Fed Governor Lael Brainard remains concerned about undershooting the 2% target for inflation, signs of sticky price growth may spur a greater dissent at the September 21 interest-rate decision especially as the U.S. economy approaches ‘full-employment.’ As a result, Chair Janet Yellen and Co. may follow a similar path to 2015 and show a greater willingness to implement higher borrowing-costs in December, but the central bank may continue to follow a ‘gradual’ approach in normalizing monetary policy as ‘most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

1.0%

1.0%

Consumer Credit (JUL)

$16.000B

$17.713B

Housing Starts (MoM) (JUL)

-0.8%

2.1%

Rising input costs paired with the expansion in private-sector credit may boost consumer prices, and a marked pickup in price growth may spur a bullish reaction in the greenback as it fuels interest-rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (JUL)

-0.1 %

-0.3%

Average Hourly Earnings (YoY) (AUG)

2.5%

2.4%

Gross Domestic Product (QoQ) (Annualized) (2Q A)

2.5%

1.2%

Nevertheless, slowing consumption accompanied by signs of a weaker recovery may encourage U.S. firms to offer discounted prices, and a weak CPI 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: Headline & Core Inflation Narrow in July

  • 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. Consumer Price Report Exceeds Market Forecast

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

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart
  • EUR/USD remains stubbornly stuck in a narrow-range following the European Central Bank (ECB) policy meeting with the pair largely capped by the Fibonacci overlap around 1.1270 (38.2% retracement) to 1.1290 (23.6% retracement), but the pair may stage a larger recovery ahead of the Federal Reserve’s September 21 interest-rate decision as the pair continues to come off of the monthly opening range.
  • 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/CAD 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)

JUL 2016

08/16/2016 12:30 GMT

0.9%

0.8%

-38

-18

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

EUR/USD 5-Minute

EUR/USD Chart

The U.S. Consumer Price Index (CPI) increased an annualized 0.8% in July following the 1.0% expansion the month prior, while the core rate of inflation unexpectedly slowed to 2.2% from 2.3% during the same period to mark the first downtick since April. A deeper look at the report showed the weakness was led by a 1.6% decline in energy prices, with transportation costs narrowing 1.1%, while the cost of housing increased another 0.3% following the 0.2% increase in June. The initial spike higher in EUR/USD was short-lived, with the pair coming off of the 1.1300 handle to end the day at 1.1276.

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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