EURUSD: Trading The U.S. Consumer Price Report

By Gregory McLeod, Michael Boutros, Currency Strategist

Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 0 4 /1 3 /2012 12:30 GMT, 8:30EST

Primary Pair Impact: EURUSD

Expected: 2.7%

Previous: 2.9%

DailyFX Forecast: 2.6% to 2.9%

Why Is This Event Important:

The headline reading for U.S. inflation is expected to fall back to 2.7% from 2.9% in February, and easing price pressures may spark a bearish reaction in the dollar as it increases the Fed’s scope to ease monetary policy further. As Fed Chairman Ben Bernanke maintains a cautious outlook for the world’s largest economy, a soft inflation report may encourage the FOMC to preserve its zero interest rate policy for a prolonged period of time, and the central bank may show an increased willingness to expand the balance sheet further as it aims to encourage a stronger recovery. However, as Fed officials take note of the more robust recovery, we should see the committee conclude its easing cycle in 2012, and the bullish sentiment underlining the USD should gather pace as market participants start to price a rate hike for the next 12-months.

Recent Economic Developments

The Upside

Release

Expected

Actual

Producer Price Index ex Food & Energy (YoY) (MAR)

2.8%

2.9%

Personal Spending (FEB)

0.6%

0.8%

Advance Retail Sales (FEB)

1.1%

1.1%

The Downside

Release

Expected

Actual

Consumer Credit (FEB)

$12.000B

$8.735B

Change in Non-Farm Payrolls (MAR)

205K

120K

Chicago Fed National activity Index (MAR)

0.00

-0.09

The stickiness in producer prices paired with the resilience in household spending may encourage businesses to pass on higher costs onto consumers, and an above-forecast print could push the EURUSD back towards 1.3000 as it dampens expectations for another round of quantitative easing. However, we may see firms continue to absorb higher costs amid the protracted recovery in the labor market along with the slowdown in private sector credit, and a weak CPI print could renew speculation for QE3 as the central bank sticks to its wait-and-see approach. In turn, we may see the EURUSD continue to retrace the decline from earlier this month, and we may see the pair ultimately make another run at 1.3400 as market participants increase bets for more easing.

Potential Price Targets For The Release

A look at theencompassing structure sees the euro breaching above daily supportat the 38.2% Fibonacci retracement taken from the January 16thadvance at 1.3155 before encountering resistance at the 50-daymoving average at 1.3210. Note that the move was accompanied by abreak back above former RSI support with the oscillator now eyeingchannel resistance dating back to February 24th. A breach above1.3210 exposes daily Fibonacci resistance at the 23.6% retracementat 1.3280 and long-term channel resistance dating back to August29th. We reserve this level as our topside limit which ifcompromised negates our medium-term bearish outlook. Daily supportnow stands at 1.3155 and the 100-day moving average at1.3135.

Our 30min scalp chart shows the single currency continuing to trade within the confines of an ascending channel formation with interim resistance currently standing at the 50% Fibonacci retracement taken from the April 2nd decline just above the 1.32-figure. A breach above this formation eyes subsequent ceilings at the 61.8% retracement at 1.3245, 1.3280 and the 78.6% retracement at the 1.33-handle. Interim support rests with the 38.2% retracement at 1.3165, 1.3140, and the 23.6% retracement at 1.3115. Should the data prompt a bullish dollar response, look to target downside levels with a break below the this channel formation eyeing targets at 1.3060 and the monthly low at 1.3030.

How To Trade This Event Risk

Forecasts for a slower rate of inflation certainly instills a bearish outlook for the greenback, but a strong CPI print could pave the way for a long U.S. dollar trade as it dampens the Fed’s scope to push through another large-scale asset purchase program. Therefore, if the headline reading tops market expectations, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, the ongoing slack within the real economy paired with the protracted recovery in the labor market may push businesses to offer discounted prices, and a soft inflation report could dampen the appeal of the greenback as the Fed maintains a cautious outlook for the region. As a result, if the headline reading weakens to 2.7% or lower, we will implement the same setup 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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB 2012

03/16/2012 12:30 GMT

2.9%

2.9%

+45

+89

February 2012 U.S. Consumer Price Index

Consumer prices in the world’s largest economy increased an annualized 2.9% for the second month in February, while the core rate of inflation weakened to 2.2% from 2.3% to mark the first slowdown since October 2010. Easing price pressures dragged on the greenback, with the EURUSD climbing back above 1.3100, and the reserve currency continue to lose ground throughout the North American trade as the pair settled at 1.3170 at the end of the day.

--- Written by David Song, Currency Analyst andMichael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

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View the Expo Presentation on ‘Trading theNews’ For Additional Resources
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2012/04/13/EURUSD_Trading_the_U.S._Consumer_Price_Report.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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