[B][U]Trading the News: U.S. Consumer Price Index[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]06/13/2008 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 3.9%
Previous: 3.9%
[B]How To Trade This Event Risk[/B]
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The May U.S. inflation report will garner extra focus given the current environment of rising energy and commodity costs. The growing concerns over global inflation has heightened to the point that the leaders of the major central banks have all expressed concerns and have hinted at possible rate hikes. Oil which broke $100 per barrel for the first time at the beginning of the year has reached as high as $140 bbl since. Companies are seeing their input costs rise and will have to start passing on costs to consumers as their margins get squeezed. The ISM manufacturing report showed prices paid rising from a level of 75.5 in February to 87.0 in May, and ISM services showed an increase from 67.9 to 77.0 for the same period. Fed chairman Ben Bernanke has been ardently hawkish and has taken every opportunity to reaffirm his stance. It appears the MPC leader is attempting to appear more concerned about rising prices than his counter part ECB President Jean-Claude Trichet. The policy maker’s comments have whipsawed the EURUSD pair as traders speculate which one will raise rates first. Indeed, Bernanke warned that rising energy prices were putting upward pressure on inflation, and said the Fed would “strongly resist” any rise in inflationary expectations.
Fed funds futures currently show traders pricing in a 44.1% chance of a quarter point rate hike in August versus 22% at the upcoming June 25 policy meeting. However, a significant uptick in inflation will increase the chances that the MPC will raise rates at their next meeting and provide bullish dollar sentiment. Therefore, we would look for an increase in CPI to 4.1% in the headline number with a 2.5% in the core read, for a long dollar position (Short EUR/USD). With a confirmed, positive fundamental release we will look for a five-minute red candle to confirm entry on two lots of EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to major resistance in the vicinity) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand ,concerns are still lingering that the credit crisis and housing slump have more to go before bottoming and without the threat of inflation, the central bank may hold off on rate hikes. A consecutive month of easing will trigger a dollar bearish trade. We will follow the same strategy for a short as the long above, just in reverse.
