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Slowing Euro-Zone Consumer Price Index (CPI) to Fuel EUR/USD Losses

Slowing Euro-Zone Consumer Price Index (CPI) to Fuel EUR/USD Losses

2017-03-31 07:00:00
David Song, Currency Strategist
Share:

- Euro-Zone Consumer Price Index (CPI) to Pull Back from Fastest Pace of Growth Since 2013.

- Core Inflation to Slow Down for First Time Since August.

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

Trading the News: Euro-Zone Consumer Price Index (CPI)

The Euro-Zone’s Consumer Price Index (CPI) may fuel the recent sell-off in EUR/USD as the headline and core rate of inflation are projected to slow in March.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Easing inflation may put increased pressure on the European Central Bank (ECB) to further extend the quantitative easing (QE) program as the Governing Council struggles to achieve its one and only mandate to ensure price stability. Even though the ECB remains on course to reduce its asset-purchases to EUR 60B/month starting in April, President Mario Draghi and Co. may retain the non-standard measure beyond the December 2017 deadline amid the ongoing slack in the monetary union. However, the ECB may continue to wind-down the QE program as ‘the monetary policy measures put in place since June 2014 are significantly supporting borrowing conditions for firms and households and thereby credit flows across the euro area,’ and signs of sticky price growth may boost the appeal of the single-currency as market participants scale back bets for more easing.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

M3 Money Supply (YoY) (FEB)

4.9%

4.7%

Household Consumption (QoQ) (4Q)

0.5%

0.4%

Retail Sales (MoM) (JAN)

0.3%

-0.1%

Narrowing sales accompanied by the recent slowdown in private-sector borrowing may drag on consumer prices, and a marked downtick in the CPI may generate fresh weekly lows in EUR/USD as it boosts speculation for additional monetary support.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (MAR A)

-5.9

-5.0

Labour Costs (YoY) (4Q)

--

1.6%

Producer Price Index (YoY) (JAN)

3.2%

3.5%

Nevertheless, European firms may pass on higher costs amid the improvement in household confidence, and stickiness in the headline and core reading for inflation may spark a bullish reaction in the Euro as the data encourages the ECB to gradually move away from its easing-cycle.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bearish EUR Trade: Headline & Core CPI Slowdown in March

  • Need red, five-minute candle following the release to consider a short EUR/USD trade.
  • If market reaction favors a short Euro trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from cost; need at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is met, set reasonable limit.

Bullish EUR Trade: Euro-Zone Inflation Report Exceeds Market Forecast

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

If you’re looking for trading ideas, check out our Trading Guides.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD extends the losses from earlier this week after failing to break the downward trend from 2016, and the pair stands at risk for a further decline as it threatens the ascending channel formation carried over from earlier this year; the Relative Strength Index (RSI) may highlight a similar dynamic as it approaches trendline support, with a break/close below the Fibonacci overlap around 1.0660 (50% expansion) to 1.0680 (78.6% expansion) opening up the next downside region of interest around 1.0600 (23.6% expansion).
  • Interim Resistance: 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion)
  • Interim Support: 1.0340 (2017-low) and 1.0370 (38.2% expansion)

Impact that the Euro-Zone CPI print has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB A

2017

03/02/2017 10:00 GMT

2.0%

2.0%

0

-21

February 2017 Euro-Zone Consumer Price Index (CPI)

EUR/USD 5-Minute

EUR/USD Chart

Chart - Created Using Trading View

The Euro-Zone’s Consumer Price Index (CPI) climbed an annualized 2.0% in February following a 1.8% expansion the month prior, while the core rate of inflation held steady at 0.9% per annum for the third consecutive month. At the same time, a separate report showed the Producer Price Index (PPI) increased an annualized 3.5% in January amid forecast for a 3.2% print, and signs of stronger price growth may limit the European Central Bank’s (ECB) scope to further support the real economy especially as the Governing Council plans to conclude its quantitative easing (QE) program in December 2017. Nevertheless, the Euro showed a limited reaction to the inflation reports, with EUR/USD losing ground during the North American trade to end the day at 1.0505.

Read More:

Gold Prices Recover Entire March Decline – FOMC, US GDP in Focus

EUR/USD – Will it Vote Yes or No on a Breakout?

FTSE 100 Dropping into Trend Support, but Will It Hold?

Crude Oil Price Forecast: Bearish Evidence Is Gathering Steam

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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