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Euro Bears at Risk on Sticky CPI- Outlook Remains Bearish Below 1.10

Euro Bears at Risk on Sticky CPI- Outlook Remains Bearish Below 1.10

David Song, Shuyang Ren,

- Euro-Zone Consumer Price Index (CPI) to Contract at Slower Pace.

- Core Inflation to Hold Steady at Annualized 07% for Second-Month.

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 dampen the bearish sentiment surrounding the Euro and spur a short-term rebound in EUR/USD should the report highlight sticky price growth across the monetary union.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Indeed, signs of stabilizing price pressures may encourage the European Central Bank (ECB) to soften its dovish outlook for monetary policy, and President Mario Draghi may talk down expectations for a further expansion in the easing cycle as the region gets on a more sustainable path.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Business Climate Indicator (MAR)

0.18

0.23

Construction Output (MoM) (JAN)

--

1.9%

Retail Sales (MoM) (JAN)

0.2%

1.1%

The pickup in business sentiment along with the expansion in private-sector consumption may generate sticky price growth in the euro-area, and a positive development may heighten the appeal of the single currency as market participants scale back bets for additional monetary support.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

M3 Money Supply (YoY) (FEB)

4.3%

4.0%

Industrial Production s.a. (MoM) (JAN)

0.2%

-0.1%

Producer Price Index (YoY) (JAN)

-3.0%

-3.4%

However, falling input prices paired with the ongoing contraction in private-sector lending may encourage European firms to further discount consumer prices, and a dismal inflation print may trigger a short-term decline in the exchange rate as the ECB keeps the door open to implement more non-standard measures.

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How To Trade This Event Risk(Video)

Bullish EUR Trade: Headline & Core Inflation Exceed Market Expectations

  • Need green, five-minute candle following the release to consider a long EUR/USD trade
  • If market reaction favors a bullish Euro trade, buy EUR/USD with two separate position
  • Set stop at the near-by swing low/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 EUR Trade: Euro-Zone CPI Highlights Greater Threat for Deflation

  • Need red, five-minute candle to favor a short EUR/USD trade
  • Implement same setup as the bullish Euro trade, just in opposite direction

Read More:

Scalp Webinar: USD Defends Support Slope- Bulls at Risk Ahead of NFP

AUD/USD Retail FX Flips Net-Long; March Low (0.7559) on Radar

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • String of failed attempts to close above the 1.1000 region may highlight a near-term topping process in EUR/USD especially as the RSI struggles to retain the bullish momentum from earlier this month.
  • Interim Resistance: 1.0970 (38.2% expansion) to 1.0990 (50% retracement)
  • Interim Support: 1.0620 (61.8% expansion) to 1.0640 (38.2% expansion)

Impact that the Euro-Zone CPI report has had on EUR during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN

2015

03/02/2015 10:00 GMT

-0.4%

-0.3%

+21

+31

January 2015 Euro-Zone Consumer Price Index (CPI)

EUR/USD Chart

The Euro-Zone’s Consumer Price Index (CPI) slipped at an annual pace of 0.3% in February after contracting 0.6% the month prior, while the core rate of inflation held steady at an annualized 0.6% for the second consecutive month. Despite the ongoing slack in the euro-area, the European Central Bank’s (ECB) quantitative easing (QE) program may continue to shore up the ailing economy as the President Mario Draghi adopts an improved outlook for the monetary union. The initial reaction in the Euro was short-lived as EUR/USD struggled to hold above the 1.1225 region, and the single currency struggled to hold its ground throughout the North American trade as the pair ended the day at 1.1181.

--- Written by David Song, Currency Analyst and Shuyang Ren

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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