EUR/USD: Trading the U.S. Consumer Price Report

November 16, 2011
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Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 11/16/2011 13:30 GMT, 8:30 EST

Primary Pair Impact: EURUSD

Expected: 3.6%

Previous: 3.9%

DailyFX Forecast:3.6% to 3.9%

Why Is This Event Important:

Consumer prices in the world’s largest economy are expected to increase at an annual rate of 3.6% in October following the 3.9% expansion in the previous month, and the slowdown in price growth may bear down on the U.S. dollar as market participants maintain see the Federal Reserve taking additional steps to stimulate the ailing economy. Easing price pressures could open the door for more monetary support as the Fed maintains a cautious outlook for the region, and Chairman Ben Bernanke may show an increased willingness to expand the central bank’s balance sheet further in order to encourage a sustainable recovery. However, as Fed officials expect economic activity to gather pace, we may see a growing rift within the FOMC, and the committee may endorse a wait-and-see in the first-half of 2012 as the economy skirts a double-dip recession.

Recent Economic Developments

The Upside

The Downside

The ongoing expansion in private sector spending paired with the rebound in household confidence may encourage businesses to pass on higher costs onto consumers, and a higher rate of inflation may help to prop up the greenback as market participants scale back speculation for another round of quantitative easing. However, the slowdown in wage growth paired with softer input prices may lead firms to keep a lid on consumer prices, and a soft inflation report could weigh on the exchange rate as investors raise bets for more easing. In turn, the rebound in the EUR/USD may gather pace on Wednesday, and the pair may work its way back towards the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900 to test for resistance.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot036.png, EUR/USD: Trading the U.S. Consumer Price Report

How To Trade This Event Risk

Expectations for a slower rate of inflation dampens the outlook for the greenback, but an above-forecast CPI print could pave the way for a long U.S. dollar trade as market participants scale back bets for QE3. Therefore, if the headline reading tops market forecast or holds steady from the previous month, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

In contrast, easing commodity prices paired with the slowdown in wage growth may lead businesses to keep a cap on consumer prices, and a soft inflation report could drag on the USD as market participants see the Fed easing monetary policy further over the coming months. As a result, if the CPI falls back to 3.6% or lower in October, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

Impact that the U.S. Consumer Price report has had on USD during the last month

September 2011 U.S. Consumer Price Index

The headline reading for U.S. inflation increased at annualized 3.9% in September to mark the fastest pace of growth since September 2008, and heightening price pressures may limit the Fed’s ability to ease monetary policy further as the headline reading for inflation continues to move away from the 2% target. A deeper look at the report showed a prices for food and beverages increased another 0.4% after expanding 0.5% in August, with transportation costs advancing 1.0%, while prices for apparel slipped 1.1% during the month. The stickiness in price growth may lead the FOMC to carry a wait-and-see approach into 2012, and the central bank may talk down speculation for another round of quantitative easing as Fed officials expect the economic recovery to gather pace over the coming months. The initial reaction to the report was short-lived as the EUR/USD slipped back below 1.3800, and the greenback continued to gain ground throughout the North American trade as the exchange rate settled a at 1.3758 at the end of the day.

EURUSD_Trading_the_U.S._Consumer_Price_Report_body_ScreenShot035.png, EUR/USD: Trading the U.S. Consumer Price Report

— 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, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

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