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Uptick in Headline & Core U.S. CPI to Derail EUR/USD Recovery

Uptick in Headline & Core U.S. CPI to Derail EUR/USD Recovery

2017-10-13 08:00:00
David Song, Strategist
Share:

- U.S. Consumer Price Index (CPI) to Increase for Third Consecutive Month.

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

- DailyFX 4Q 2017 Forecasts Are Now Available!

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

U.S. CPI

An uptick in both the headline and core U.S. Consumer Price Index (CPI) may undermine the near-term rebound in EUR/USD as it encourages the Federal Open Market Committee (FOMC) to implement higher borrowing-costs over the coming months.

However, a dismal development may ultimately spark a bearish reaction in the greenback especially as Chair Janet Yellen warns the FOMC ‘may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.’ Even though Fed Fund Futures highlight a greater than 80% for a December rate-hike, a growing number of central bank officials may project a more shallow path for the benchmark interest rate as the committee notes ‘that the persistence of low inflation might result in the federal funds rate staying uncomfortably close to its effective lower bound.

Impact that the U.S. 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)

AUG

2017

09/14/2017 18:00:00 GMT

1.8%

1.9%

-13

+25

August 2017 U.S. Consumer Price Index (CPI)

EUR/USD 5-Minute Chart

EUR/USD Chart

The U.S. Consumer Price Index (CPI) climbed to an annualized 1.9% in August from 1.7% the month prior, while the core rate of inflation held steady at 1.7% per annum amid forecasts for a 1.6% print. A deeper look at the report showed Energy prices climbing 2.8% to lead the advance, with Transportation costs also rising 1.4%, while prices for apparel increased a marginal 0.1% in August. The initial reaction to the CPI report was short-lived, with EUR/USD climbing back above the 1.1900 handle to end the day at 1.1918.

How To Trade This Event Risk(Video)

Bullish USD Trade: Headline & Core CPI Pick Up in September

  • Need a red, five-minute candle following the CPI report to favor a short EUR/USD trade.
  • If the market reaction favors a bullish dollar 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.

Bearish USD Trade: U.S. Inflation Report Fails to Meet Market Forecast

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

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Sign Up & Join DailyFX Currency Analyst David Song to Discuss Key FX Themes & Potential Trade Setups

  • EUR/USD struggles to hold its ground ahead of the U.S. CPI report, with the lack of momentum to close above the 1.1860 (161.8% expansion) region raising the risk for range-bound prices, with near-term support coming in around 1.1670 (50% retracement).
  • Keep in mind, the Relative Strength Index (RSI) has yet to test trendline resistance, with both price and the momentum indicator still preserving the bearish formations carried over from the summer months.
  • Nevertheless, the failed attempt to test the August-low (1.1662) fosters a constructive outlook for EUR/USD, with the next topside hurdle coming in around 1.1960 (38.2% retracement).
  • Interim Resistance: 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion)
  • Interim Support: 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion)

EUR/USD Retail Sentiment

EUR/USD Retail Sentiment

See how shifts in EUR/USD retail positioning are impacting trend- Click here to learn more about sentiment!

Retail trader data shows 33.4% of traders are net-long EUR/USD with the ratio of traders short to long at 2.0 to 1.

In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.08123; price has moved 9.5% higher since then. The number of traders net-long is 11.0% lower than yesterday and 6.7% lower from last week, while the number of traders net-short is 14.8% higher than yesterday and 12.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

--- 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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