EURUSD Rebound Vulnerable to Strong U.S. Consumer Price Index (CPI)

Trading the News: U.S. Consumer Price Index (CPI)

Updates to the U.S. Consumer Price Index (CPI) may spur a bullish reaction in the dollar as the headline reading for inflation is projected to increase to 1.8% from 1.5% per annum in February.

Indications of sticky price growth may undermine the recent shift in the Federal Reserves forward-guidance for monetary policy as the fresh figures are also expected to show the core reading hold steady at 2.1% in March. In turn, a positive development may curb the recent rebound in EUR/USD as it puts pressure on the Federal Open Market Committee (FOMC) to deliver a rate-hike in 2019.

However, another unexpected downtick in both the headline and core CPI may drag on the U.S. as it encourages Fed Chairman Jerome Powell & Co. to abandon the hiking-cycle. Keep in mind, EUR/USD may face increased volatility following the U.S. data prints as the European Central Bank (ECB) President Mario Draghi hosts his press conference following the policy meeting.

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Impact that the U.S. CPI report had on EUR/USD during the previous print

February 2019 U.S. Consumer Price Index (CPI)

EUR/USD 5-Minute Chart

The U.S. Consumer Price Index (CPI) unexpectedly narrowed to 1.5% from 1.6% per annum in January, with the core rate of inflation highlighting a similar dynamic as the index slipped to 2.1% from 2.2% during the same period. A deeper look at the report showed the weakness was led by a 1.0% drop in prescription-drug prices, with the cost for used cars and trucks falling 0.7% in February, while gas prices climbed 1.5% after falling 5.5% the month prior.

The U.S. dollar struggled to hold its ground following the below-forecast prints, with EUR/USD grinding higher throughout the day to close at 1.1286. Review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

EUR/USD Rate Daily Chart

• The failed attempt to test the 2019-low (1.1176) along with the lack of momentum to close below the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) may spur range-bound conditions in EUR/USD, with a break/close back above the 1.1270 (50% expansion) to 1.1290 (61.8% expansion) region raising the risk for a move towards 1.1340 (38.2% expansion).

• Next area of interest comes in around 1.1390 (61.8% retracement) to 1.1400 (50% expansion) followed by the 1.1430 (23.6% expansion) to 1.1450 (50% retracement), which largely lines up with the March-high (1.1448).

For more in-depth analysis, check out the 2Q 2019 Forecast for EUR/USD

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.