[Cancelled without entry] US CPI Alert: How to Trade The EUR/USD
Wednesday, September 11, Week 37
The US CPI report, a key economic indicator, is scheduled for release today. This report will provide crucial insights into the trajectory of inflation in the US and could significantly impact the Federal Reserve's monetary policy decisions. The EUR/USD forex pair has been chosen as the instrument to trade this event due to its sensitivity to changes in US interest rate expectations and the euro's status as a major global reserve currency.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Understanding the US CPI and Its Implications for Forex Traders
The US Consumer Price Index (CPI), also known as the headline inflation rate, is a widely followed economic indicator that measures the average change in prices paid by urban consumers for a basket of consumer goods and services. Forex traders closely monitor the CPI release for insights into inflationary pressures in the US economy, as it can significantly influence the Federal Reserve's monetary policy decisions. A higher-than-expected CPI reading typically suggests rising inflation, potentially leading to a more hawkish Fed stance and a stronger US dollar. Conversely, a lower-than-expected CPI reading indicates easing inflation, potentially leading to a more dovish Fed stance and a weaker US dollar.
The market consensus for the August US CPI is 2.6%. Trading Economics forecasts a 2.7% reading. The previous US CPI reading for July came in at 2.9%, below market expectations of 3% and marking the fourth consecutive month of slowing inflation.
The Previous US CPI Release and Its Impact on the EUR/USD
The July US CPI release showed a continued cooling trend in inflation, with the headline rate falling to 2.9%, its lowest level since March 2021. This reading was below market expectations of 3% and reinforced the view that the Federal Reserve is nearing the end of its tightening cycle.
Economic Indicators and the EUR/USD Outlook
The economic indicators associated with the EUR/USD have shown mixed performance over the past six months. The Eurozone economy has been grappling with slowing growth, while the US economy has shown signs of resilience despite the Fed's aggressive interest rate hikes.
In the Eurozone, the GDP growth rate has been sluggish, with the second quarter of 2024 recording a contraction of 0.1% in Germany, the bloc's largest economy. The Eurozone's manufacturing sector has also been struggling, with the HCOB Manufacturing PMI remaining in contractionary territory for over two years. However, the services sector has shown some resilience, with the HCOB Services PMI remaining in expansionary territory.
In the US, the economy expanded by 3% in the second quarter of 2024, exceeding expectations. However, the manufacturing sector has shown signs of weakness, with the ISM Manufacturing PMI reporting five consecutive months of contraction. The labour market has remained relatively strong, with the unemployment rate falling to 4.2% in August. However, the August jobs report showed weaker-than-expected job growth, raising concerns about a potential slowdown in the economy.
EUR/USD: Navigating a Shifting Landscape
EUR/USD, the most traded currency pair in forex, is influenced by interest rate differences between the US and Eurozone, risk sentiment, and economic data.
Over the previous week to date, the EUR/USD has been steady. This follows an uptrend during the previous month to date, where the pair rallied, potentially targeting 1.123.
EUR/USD and the US CPI: A Potential Turning Point?
If the US CPI report comes in at the consensus forecast of 2.6%, it would suggest that inflation is moderating as expected, potentially supporting the case for a Fed rate cut. This could lead to a further weakening of the US dollar and a strengthening of the EUR/USD. However, the euro's gains may be limited by the ECB's own dovish stance and the potential for further rate cuts in the Eurozone.
Upcoming Events and Their Potential Impact on the EUR/USD
The ECB's interest rate decision, scheduled for Thursday, September 12th, Week 37, is a key event that could significantly impact the EUR/USD. The market expects the ECB to cut interest rates by 25 basis points, which could weaken the euro in the short term. However, the euro's longer-term trajectory will depend on the ECB's communication and the market's perception of the central bank's policy outlook.
Trade Thesis: Capitalising on the US CPI Release
Scenario 1: US CPI Below Consensus
If the US CPI comes in below the consensus forecast of 2.6%, it would suggest that inflation is moderating more than expected, potentially strengthening the case for a more aggressive Fed rate cut. This could lead to a sharp weakening of the US dollar and a strengthening of the EUR/USD. In this scenario, a long position in the EUR/USD could be considered, targeting a move towards the 1.1200 resistance level. The conviction level for this trade would be high, given the potential for a significant market reaction to a dovish surprise from the Fed.
Scenario 2: US CPI Above Consensus
If the US CPI comes in above the consensus forecast of 2.6%, it would suggest that inflation is more persistent than expected, potentially leading to a less aggressive Fed rate cut or even a delay in easing monetary policy. This could lead to a strengthening of the US dollar and a weakening of the EUR/USD. In this scenario, a short position in the EUR/USD could be considered, targeting a move towards the 1.0950 support level. The conviction level for this trade would be moderate, given the mixed economic data and the potential for the Fed to maintain a cautious stance.
Sources
U.S. Bureau of Labor Statistics
European Central Bank
Trading Economics
Financial Juice