Trading the News: U.S. Consumer Price Index
What’s Expected:
Time of release: 02/21/2013 13:30 GMT, 8:30 EST
Primary Pair Impact: EURUSD
Expected: 1.6%
Previous: 1.7%
DailyFX Forecast: 1.6% to 1.7%
Why Is This Event Important:
The headline reading for U.S. inflation is projected to increase 1.6% following the 1.7% rise in December, and ease price pressures may drag on the dollar as it raises the Fed’s scope to expand the balance sheet further. However, as a growing number of FOMC officials drop their dovish tone for monetary policy, a slower rate of price growth may have a limited impact in producing a bearish reaction in the USD, and we may see the bullish sentiment surrounding the greenback gather pace throughout 2013 as the central bank appears to be moving away from its easing cycle.
Recent Economic Developments
The Upside
| Release | Expected | Actual |
| U. of Michigan Confidence (FEB P) | 74.8 | 76.3 |
| Consumer Credit (DEC) | $14.000B | $14.595B |
| Personal Income (DEC) | 0.8% | 2.6% |
The Downside
| Release | Expected | Actual |
| Produce Price Index (YoY) (DEC) | 1.5% | 1.4% |
| Advance Retail Sales (JAN) | 0.1% | 0.1% |
| Import Price Index (YoY) (JAN) | -1.0% | -1.3% |
The ongoing improvement in household confidence along with the pickup in wage growth may encourage businesses to pass on higher costs onto consumers, and an uptick in the CPI should prop up the dollar as the pickup in growth and inflation dampens the Fed’s scope to expand the balance sheet further. However, firms across the U.S. may offer further discounts amid the recent slowdown in private sector consumption, and we may see the FOMC continue to carry out its easing cycle throughout the first-half of 2013 in an effort to encourage a stronger recovery.
Potential Price Targets For The Release
As the relative strength index on the EURUSD fails to maintain the upward trend carried over from November, the pair looks poised for a move back towards the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, and we may see the euro-dollar threaten the ascending channel from the previous year as the fundamental outlook for the U.S. improves. However, a decline in the CPI may produce a short-term rebound in the exchange rate as the EURUSD comes up against trendline support, and we may see the pair consolidate before making a move lower if the data heightens bets for a further expansion in the Fed’s balance sheet.
Expectations for a slower rate of inflation favors a bearish forecast for the greenback, but a stronger-than-expected print may pave the way for a long U.S. dollar trade as the Fed adopts a more neutral tone for monetary policy. Therefore, if the consumer price report tops market forecast, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high, 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.