EUR/USD: Trading the U.S. Consumer Price Report
Tuesday, 18 May 2010 14:44 GMT | Written by David Song, Currency Analyst
Consumer prices in the U.S. are expected to tip 0.1% higher for the second consecutive month in April, while the headline reading for inflation is projected to expand to an annualized pace of 2.4% from 2.3% in March, which would be the highest reading since January.
Trading the News: U.S. Consumer Price Index
Why Is This Event Important:
As Fed Chairman Ben Bernanke maintains his pledge to keep borrowing costs near zero for an “extended period,” subdued inflation would certainly give the central bank scope to maintain a dovish policy stance in the second-half of 2010, which could lead investors to scale back expectations for a rate hike later this year. However, as the economic recovery gathers pace, heightening price pressures may lead the FOMC to drop its dovish bias for monetary policy and lead the central bank to raise its outlook for growth and inflation.
What’s Expected:
Time of release: 05/19/2010 12:30 GMT, 8:30 EST
Primary Pair Impact : EURUSD
Expected: 2.4%
Previous: 2.3%
Will This Be Market Moving (Scenarios):
Consumer prices in the U.S. are expected to tip 0.1% higher for the second consecutive month in April, while the headline reading for inflation is projected to expand to an annualized pace of 2.4% from 2.3% in March, which would be the highest reading since January. At the same time, the core CPI is anticipated to fall back to 1.0% from 1.1% in the previous month, and the ongoing slack within the real economy may continue to drag on inflation as households face a weakened labor market paired with tightening credit conditions.
The Upside
As personal spending accelerates in the first-quarter, businesses may look to pass on higher costs to consumers as household confidence continues to recover. At the same time, the Fed said that “the labor market is beginning to improve,” with Kansas City Fed President Thomas Hoenig arguing that “exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” and rising price pressures could certainly lead the FOMC to normalize policy further over the coming months as it aims to balance the risks for the economy
The Downside
However, firms may look to absorb the rise in raw materials as policy makers continue to see ongoing slack within the economy, and a weaker-than-forecast inflation report could weigh on interest rate expectations as the Fed anticipates pressures to remain moderate over the medium term. The MPC said that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” and the Fed may look to support the economy throughout the second-half of the year as policy makers aim to encourage a sustainable recovery.
How To Trade This Event Risk
Higher inflation would certainly limit the central bank’s willingness to maintain a dovish policy stance over the coming months as it maintains its dual mandate to ensure price stability while promoting full-employment, and price action following the release could set the stage for a long dollar trade as investors increase speculation for a rate hike later this year. Therefore, if the headline reading rises to an annualized pace of 2.4% or higher, we will need to see a red, five-minute candle following the data to generate 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 after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its market in an effort to lock-in our profits.
On the other hand, the weakness in the labor market paired with the ongoing slack in the real economy may continue to drag on inflation, and a weaker-than-expected CPI report could weigh on the exchange rate as market participants curb expectations for the central bank to tighten monetary policy later this year. As a result, if price growth unexpectedly holds flat or expand at a slower pace from the previous month, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.