EURUSD: Trading the U.S. CPI Report

Published October 14th, 2009 - 08:47 GMT

Consumer prices are forecasted to have risen for a second month on a yearly basis from -1.5% to -1.4% during September. Expectations are that inflation grew by 0.2% during the month as energy costs pushed higher.

Trading the News: U.S. Consumer Price Index

What’s Expected

Time of release: 10/15/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -1.4%
Previous: -1.5%

Impact the U.S. Consumer Price Index report had over EURUSD for the past 2 months

August 2009 U.S. Consumer Price Index

The decline in U.S. consumer prices  slowed to -1.5% from 1-1.7% on a yearly basis due to rising transportation and housing costs. A 9.1% increase in gasoline costs along with increased demand for used cars and trucks raised the cost for Americans to get around. Meanwhile, rising insurance and utilities charges added to shelter expenses. Rising oil prices helped stem deflationary risks but a 0.4% rise in prices during the month  supported arguments that inflation may be returning. However, the threat is still far from real and with downside risk remaining the data did little to increase interest rate expectations. Therefore, with little reaction to the data we were left on the sidelines.

July 2009 U.S. Consumer Price Index

Inflation in the U.S. fell to 2.1% which marked the largest 12 month decrease in 50 years. However, there was little fanfare over the release as consumer prices during the month were flat while the core reading rose 0.1% as expected. A 1.1% rise in apparel costs may be a sign that retailers are regaining pricing power as the economy begins to stabilize. However, declines in food and housing costs keep alive deflationary risks. Prevailing risk aversion overshadowed the release as markets became concerned that domestic growth would be hard to find once government stimulus efforts dissipated.

What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

How To Trade This Event Risk

Consumer prices are forecasted to have risen for a second month on a yearly basis from -1.5% to -1.4% during September. Expectations are that inflation grew by 0.2% during the month as energy costs pushed higher. A flat core reading would be a sign that the economy is generating growth without fueling upside risks to inflation. This would allow the Fed to remain on hold deep into next year as they have maintained is their goal. However, we have started to hear tightening rhetoric from policy officials with Kansas City Federal Reserve President Tom Hoeing stating last week that the central bank should start raising rate “sooner rather than later.” The FOMC alternate is concerns that the impact from rates hike will take considerable time to be felt by the economy and that eventually these steps will need to be taken to head off rising inflation. Fed funds futures are currently pricing in a 4.2% chance of a rate hike by the end of the year which is the highest it’s been in over a month. Considering the prevailing risk appetite we may need to see a significant rise in the core inflation reading to see dollar support. Also, traders must be aware of earnings reports from Citigroup and Goldman Sachs close to the release of the consumer price report.

Trading the given event risk may not be as clear cut as some of our previous trades however, an enhanced CPI reading could reinforce long-term expectations for higher interest rates in the U.S., with price action following a better-than-expected release could set the stage for a long dollar trade. Therefore, if the annual rate of inflation falls 1.1% or less from the previous year, we will look for a red, five-minute candle following the release to confirm a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, subdued price pressure will allow keep yield expectations anchored and leave dollar sentiment at the mercy of risk sentiment . As a result, an in-line print or a drop of more than 1.4% would favor a bearish outlook for the greenback, and we will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.


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To discuss this report contact John Rivera, Currency Analyst:

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