Trading the News: U.S. Consumer Price Index
What’s Expected:
Time of release: 01/19/2012 13:30 GMT, 8:30 EST
Primary Pair Impact: EURUSD
Expected: 3.0%
Previous: 3.4%
DailyFX Forecast: 3.0% to 3.2%
Why Is This Event Important:
Consumer prices in the world’s largest economy are projected to increase at an annual rate of 3.0% in December, and the weakening outlook for inflation may drag on the USD as it increases the scope for another round of quantitative easing. In turn, a soft inflation report could trigger a bearish reaction in the dollar, and the greenback may continue to give back the advance from earlier this year as Fed Chairman Ben Bernanke maintains a dovish outlook for monetary policy. However, as consumer prices excluding food and energy are expected to hold steady at 2.2%, currency traders may show a greater reaction to the stickiness in the core rate of inflation, and we may see a lot of noise immediately following the release as market participants weigh the prospects for future policy.
Recent Economic Developments
The Upside
Release | Expected | Actual |
U. of Michigan Confidence (JAN P) | 71.5 | 74.0 |
Consumer Credit (NOV) | $7.000B | $20.374B |
Consumer Confidence (DEC) | 58.9 | 64.5 |
The Downside
Release | Expected | Actual |
Producer Price Index (YoY) (NOV) | 5.1% | 4.8% |
Advance Retail Sales (DEC) | 0.3% | 0.1% |
Personal Income (NOV) | 0.2% | 0.1% |
The ongoing improvement in household sentiment paired with the marked expansion in private sector credit may encourage businesses to ramp up consumer prices, and the development may prop up the greenback as the economic recovery gradually gathers pace. However, easing input costs paired with the slowdown in household consumption may lead firms to keep a lid on retail prices, and a slower rate of inflation may increase the Fed’s scope to further expand monetary policy as the central bank aims to balance the risks surrounding the economy. In turn, the short-term rebound in the EUR/USD may gather pace over the next 24-hours of trading, and the exchange rate work its way back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100 as market participants increase bets for another large-scale asset purchase program.
Potential Price Targets For The Release
How To Trade This Event Risk
Expectations for a slower rate of inflation casts a bearish outlook for the greenback, but an above-forecast print could pave the way for a long U.S. dollar trade as currency trades scale back expectations for additional monetary support. Therefore, if the headline reading crosses the wires at 3.2% or higher, we will need to see a red, five-minute candle subsequent to the release 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 from the entry, 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 mark in order to preserve our winnings.
On the other hand, easing commodity prices paired with the slowdown in private sector consumption could ultimately lead to a soft inflation report, and easing price pressures may lead the Fed to further expand its balance sheet as it aims to encourage a sustainable recovery. As a result, if the CPI comes in at 3.0% or lower, we will implement the same strategy for a long euro-dollar trade as the short position laid out 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) |
NOV 2011 | 12/16/2011 13:30 GMT | 3.5% | 3.4% | -28 | -31 |
November 2011 U.S. Consumer Price Index
The headline reading for U.S. inflation slowed in November, with price growth increasing an annualized 3.4%, while core consumer prices increased 2.2% during the same period to mark the fastest pace of growth since October 2008. The breakdown of the report showed energy prices falling 1.6% during the month, with transportation costs weakening 0.8%, while prices for apparel increased another 0.6% after expanding 0.4% in October. As easing commodity prices dampens the outlook for inflation, the Federal Reserve may keep the door open to expand monetary policy further, but the recent rise in the core CPI may keep the central bank on the sidelines as Fed officials aim to strive to balance the risks surrounding the world’s largest economy. The initial reaction to the inflation report was short-lived, with the EUR/USD slipping back below 1.3050, and the greenback continued to gain ground throughout the North American trade as the exchange rate ended the day at 1.3038.
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
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