[B]Trading the News: US Consumer Price Index[/B]
[B][U]What’s Expected[/U][/B]
Time of release: [B]12/14/2007 13:30 GMT, 08:30 EST
[/B]Primary Pair Impact : [B]EURUSD[/B]
Expected: [B]4.1%[/B]
Previous: 3.5%
[B]How To Trade This Event Risk[/B]
The closely-watched Consumer Price Index has been a limited mover over the past few months as the turmoil in the financial markets overshadowed concerns of heightened inflation pressures for rate speculators. For the November release, the CPI’s impact on the Fed’s rate policy will once again be the primary focus for the currency market. Earlier this week, the Federal Open Market Committee cut the benchmark US lending rate by another quarter percent for a cumulative 100 basis points worth of easing. What’s more, the brief statement that accompanied the decision revealed policy makers had dropped the past observations that upside risks to inflation were “roughly” balanced with downside risks to growth. At the same time, the statement retained its concerns that rising energy and commodity prices, among other factors, would contribute to price pressures well beyond the central bank’s tolerance level. Considering the uncertainty surrounding inflation’s influence on Fed policy - and more importantly, speculation for Fed policy - any trades taken on this event risk would be best served with a substantial divergence between the actual print and the official consensus.
Considering the market is expecting a further acceleration in the headline CPI gauge, a long dollar position (short EURUSD) would likely experience the most exaggerated response to a surprise print when the data crosses the wires. What’s more, after the upstream, producer price index recorded its biggest monthly increase in 34 years and the fastest pace of growth on an annual basis 1981, the pressure for a better than expected print has grown. Taking our cue from the reaction from the market after the three previous CPI releases, we will keep our risk limited in the even the data rises in line with expectations. What’s more taking a trade on this outcome would be somewhat risky as the fundamental edge is slight; so, we will set our second profit objective close to (or perhaps even equal to) our first target. Ultimately, such a trade will be defined by major support levels seen in EURUSD. Alternatively, if there is a marked upside surprise from the annual headline and/or core CPI numbers (0.3 percentage points for the headline number and 0.1 percentage point for the core, or more), we will be more confident in our trade and allow for more aggressive targets. With the right mix of fundamentals, we will look for five minute red candle to confirm a short on two lots of EURUSD at market. We will immediately put a stop at the nearby swing high (or reasonable distance) and set our first target equal to a single lot’s risk. Our second target will be discretionary and to preserve profit, will move our stop on the second lot to break even when the first half of the trade hits its target.
On the other hand, with the Fed easing its inflation warnings and the market pricing in a 100 percent chance for a rate cut at the January meeting, an unexpected cooling for the CPI could break the dollar’s rebound. Our strategy for a long will be similar to a long, just in reverse.
