Trading the News: U.S. Consumer Price Index (CPI)
A further slowdown in the U.S. Consumer Price Index (CPI) may spark a bearish dollar reaction (bullish EUR/USD) as the majority of the Federal Open Market Committee (FOMC) remain in no rush to normalize monetary policy.
What’s Expected:
Even though the Fed is widely expected to conclude its quantitative easing (QE) program at the October 29 meeting, subdued price growth may encourage the FOMC to retain the zero-interest rate policy (ZIRP) for an extended period of time in order to promote a stronger recovery.
Expectations: Bearish Argument/Scenario
Release | Expected | Actual |
Advance Retail Sales (MoM) (SEP) | -0.1% | -0.3% |
Producer Price Index (YoY) (SEP) | 1.8% | 1.6% |
Durable Goods Orders (AUG) | -18.0% | -18.2% |
Easing input costs along with the slowdown in private-sector consumption may spur a weak CPI print, and the EUR/USD may face a larger correction over the near-term should the fundamental development drag on interest rate expectations.
Risk: Bullish Argument/Scenario
Release | Expected | Actual |
Non-Farm Payrolls (SEP) | 215K | 248K |
Personal Income (AUG) | 0.3% | 0.3% |
Gross Domestic Product (QoQ) (Annualized) (2Q F) | 4.6% | 4.6% |
Nevertheless, the ongoing recovery in the labor market paired with the pickup in economic activity may show an unexpected uptick in price growth, and a stronger-than-expected inflation report may generate another wave of USD strength as market participants boost bets for higher borrowing costs.
How To Trade This Event Risk(Video)
Bearish USD Trade: Headline & Core Inflation Continue to Undershoot
- Need to see green, five-minute candle following the release to consider a long trade on EUR/USD
- If market reaction favors a bearish dollar 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
Bullish USD Trade: Price Growth Tops Market Expectations & Boosts Rate Expectations
- Need green, five-minute candle to favor a short EUR/USD trade
- Implement same setup as the bearish dollar trade, just in the opposite direction
Potential Price Targets For The Release
EUR/USD Daily Chart
Chart - Created Using FXCM Marketscope 2.0
- Failure to retain the bullish RSI momentum raises the risk for a further decline in EUR/USD.
- Interim Resistance: 1.2900 (61.8% retracement) to 1.2940 (38.2% expansion)
- Interim Support: 1.2460 (78.6% retracement) to 1.2500 Pivot
Impact that the U.S. ISM Manufacturing report has had on EUR/USD during the last release
Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
AUG 2014 | 9/17/2014 12:30 GMT | 1.9% | 1.7% | +1 | -93 |
August 2014 U.S. Consumer Price Index
The U.S. Consumer Price Index (CPI) slowed more-than-expected in August, with the headline reading slipping to 1.7% from 2.0% in July, while the core rate of inflation unexpectedly narrowed to 1.7% to mark the slowest pace of growth since March. Even though the Fed argues inflation expectations remain firmly anchored, subdued price growth may continue to delay the normalization cycle as Chair Janet Yellen remains in no rush to abandon the zero-interest rate policy (ZIRP). Despite the limited market reaction to the weak CPI print, the greenback regained its footing during the North America trade, with the EUR/USD dipping below the 1.2850 region and closing the day at 1.2864.