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Euro Rally Vulnerable to Slowing Consumer Price Index (CPI)

Euro Rally Vulnerable to Slowing Consumer Price Index (CPI)

2017-06-30 05:00:00
David Song, Currency Strategist
Share:

- Euro-Zone Consumer Price Index (CPI) to Narrow for Second Straight Month.

- Core Rate of Inflation to Uptick for First Time Since April.

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

Euro Zone CPI

Another downtick in the Euro-Zone’s Consumer Price Index (CPI) may spark a bearish reaction in EUR/USD as it puts pressure on the European Central Bank (ECB) to carry the quantitative easing (QE) program beyond December 2017.

Why Is This Event Important:

The ECB may largely endorse a wait-and-see approach at the next policy meeting on July 20 as the central bank cuts its inflation forecast and warns ‘measures of underlying inflation remain low and have yet to show convincing signs of a pick-up.’ Nevertheless, stickiness in the core rate of inflation may fuel the near-term rally in EUR/USD as President Mario Draghi declares ‘deflationary forces have been replaced by reflationary ones,’ and the Governing Council may gradually change its tune over the coming months as the central bank now sees the euro-area growing an annualized 1.9% in 2017.

Impact that the Euro-Zone CPI report 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)

MAY A

2017

05/31/2017 09:00:00 GMT

1.5%

1.4%

+14

+68

May 2017 Euro-Zone Consumer Price Index (CPI)

EUR/USD 5-Minute

EUR/USD Chart

Join the DailyFX Trading Webinarsfor an opportunity to discuss potential trade setups.

The Euro-Zone’s Consumer Price Index (CPI) narrowed more-than-expected in May, with the gauge slipping to an annualized 1.4% from 1.9% in April. The core rate of inflation reflected a similar dynamic as the reading softened to 0.9% per annum from 1.2% the month prior, while a separate report showed the euro-area jobless rate falling to an annualized 9.3% from a revised 9.4% in March. Despite the limited reaction to the mixed data prints, the Euro gained ground throughout the North American trade, with EUR/USD closing the day at 1.1242.

How To Trade This Event Risk(Video)

Bearish EUR Trade: Headline & Core Inflation Slows in June

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

Bullish EUR Trade: Euro-Zone CPI Exceeds Market Expectations

  • Need a green, five-minute EUR/USD candle to favor a long Euro position.
  • Carry out the same setup as the bearish Euro setup, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Topside targets remain in focus for EUR/USD as it extends the bullish sequence carried over from the previous week, while the Relative Strength Index (RSI) shows a more convicting break of the downward trend from May; will keep a close eye on the momentum indicator as flirts with overbought territory and appears to be pushing above 70.
  • After clearing the June 2016-high (1.1428), next topside hurdle comes in around 1.1480 (78.6% expansion) followed by 1.1580 (100% expansion).
  • Interim Resistance: 1.1616 (2016-high) to 1.1670 (78.6% expansion)
  • Interim Support: 1.0980 (50% retracement) to 1.1020 (50% expansion)

Make Sure to Check Out the DailyFX Guides for Additional Trading Ideas!

IG Sentiment

Retail trader data shows 18.6% of traders are net-long EUR/USD with the ratio of traders short to long at 4.37 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.0589; price has moved 8.0% higher since then. The number of traders net-long is 10.3% lower than yesterday and 39.2% lower from last week, while the number of traders net-short is 10.1% higher than yesterday and 22.2% higher from last week. For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

--- 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.

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