Strong U.S. Consumer Price Index (CPI) to Tame EUR/USD Resilience
- 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%.
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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.
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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
|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
|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 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!
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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|
|JUL 2016||08/16/2016 12:30 GMT||0.9%||0.8%||-38||-18|
July 2016 U.S. Consumer Price Index (CPI)
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.
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--- Written by David Song, Currency Analyst
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