Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 08/15/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.5%

Previous: 1.7%

DailyFX Forecast: 1.5% to 1.7%

Why Is This Event Important:

Consumer prices in the U.S. are expected to expand 1.5% in July after climbing 1.7% the month prior, and easing price pressures may heighten expectations for additional monetary support as the Fed maintains a cautious outlook for the world’s largest economy. At the same time, the core rate of inflation is expected to hold steady at 2.2% for the second consecutive month, and the stickiness in underlying inflation may instill a bullish outlook for the U.S. dollar as it limits the Fed’s scope to expand its balance sheet further. In turn, an in-line print across the CPI figures may produce whipsaw-like price action in the greenback, but we will be keeping a close eye on the core reading as it continues to hold above the 2% target for inflation.

Recent Economic Developments

The Upside

Release	Expected	Actual
Advance Retail Sales (JUL)	0.3%	0.8%
Produce Price Index ex Food & Energy (YoY) (JUL)	2.3%	2.5%
Personal Income (JUN)	0.4%	0.5%

The Downside

Release	Expected	Actual
NFIB Small Business Optimism (JUL)	91.6	91.2
Wholesale Inventories (JUN)	0.3%	-0.2%
Unemployment Rate (JUL)	8.2%	8.3%

The rebound in household spending paired with the uptick in wage growth may encourage businesses to pass on higher costs onto consumers, and a strong inflation print may encourage the Fed to soften its dovish tone for monetary policy as the recovery gradually gathers pace. However, as high unemployment along with the ongoing slack within the real economy dampens the outlook for private sector consumption, firms may continue to conduct heavy discounting to draw demands, and easing price pressures may weigh on the greenback as it fuels speculation for more quantitative easing.

Potential Price Targets For The Release

As the EURUSD fails to put in a close above the 50-Day SMA (1.2392), the pair appears to be carving out a lower high in August, and we may see the pair give back the rebound from July (1.2041) as the downward trend carried over from the previous year continues to take shape. However, there appears to be a bullish divergence in the relative strength index as the oscillator continues to move away from oversold territory, and a soft inflation print may produce a meaningful move above the 1.2400 figure as it fuels speculation for QE3. For a complete technical outlook including intra-day scalp targets, refer to yesterday's Winners/Losers report.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades amid the deviation in market expectations, but a stronger headline and core print could pave the way for a long U.S. dollar trade as it dampens the scope for QE3. Therefore, if the inflation report tops forecast, we will need 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 set 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 breakeven once the first trade hits its mark in an effort to lock-in our gains.

However, the ongoing weakness in the labor market paired with the persist slack within the real economy may continue to drag on price growth, and a soft inflation report may fuel expectations for more quantitative easing as the Fed keeps the door open to expand its balance sheet further. As a result, if price growth tapers off in July, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

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)
JUN 2012	07/17/2012 12:30 GMT	1.6%	1.7%	+9	+18

June 2012 U.S. Consumer Price Index

Consumer prices in the world’s largest economy increased an annualized 1.7% for the second consecutive month in June, while the core rate of inflation advanced 2.2% during the same period to mark the slowest pace of growth since February. Indeed, the initial reaction was fairly muted, with the EURUSD maintain the narrow range ahead of the release, but the greenback struggled to hold its ground throughout the North American trade as the pair closed at 1.2292.