Trading the News: Euro-Zone Consumer Price Index (CPI)

EUR/USD stands at risk of extending the decline from the previous week as the 3Q Euro-Zone Gross Domestic Product (GDP) report is expected to show the economy growing another 2.3%, while the Consumer Price Index (CPI) is anticipated to hold steady at an annualized 1.5% for the third consecutive month in October.

A batch of lackluster data prints may do little to prop up the single-currency as President Mario Draghi & Co. plan to carry the quantitative easing (QE) program into 2018, and the euro-dollar exchange may face a more meaningful correction over the remainder of the year as the Governing Council remains in no rush to move away from its easing-cycle.

However, a series of above-forecast prints may spark a bullish reaction in EUR/USD as it encourages the ECB to adopt an improved outlook for the monetary union. In turn, the central bank may continue change its tune over the coming months as ‘the strong cyclical momentum, as evidenced in recent developments in sentiment indicators, could lead to further positive growth surprises.’

Impact that the Euro-Zone CPI report has had on EUR/USD during the previous release

September 2017 Euro-Zone Consumer Price Index (CPI)

EUR/USD 5-Minute Chart

The Euro-Zone Consumer Price Index (CPI) held steady at an annualized 1.5% for the second consecutive month in September, while the core rate of inflation unexpectedly narrowed to 1.1% from 1.2% during the same period. The preliminary reading showed energy prices slowing to 3.9% per annum from 4.0% in August, with the cost for services also narrowing to 1.5% from 1.6%, while prices for Food, Alcohol and Tobacco increased an annualized 1.9% after expanding 1.4% during the previous month. Nevertheless, the initial dip in EUR/USD was short-lived, with the pair climbing back above the 1.1800 handle to end the day at 1.1812.

How To Trade This Event Risk

Bearish EUR Trade: 3Q GDP & October CPI Hold Steady

• Need a red, five-minute candle following the report to consider a short EUR/USD setup.
• If market reaction favors a bearish Euro position, sell EUR/USD with two separate lots.
• Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
• Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bullish EUR Trade: Euro-Zone Growth, Inflation Tops Market Forecast

• Need a green, five-minute EUR/USD candle to consider a long Euro setup.
• Carry out the same setup as the bearish Euro trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily

• Downside targets remain on the radar for EUR/USD as a head-and-shoulders formation unfolds, with the both price & the Relative Strength Index (RSI) still preserving the bearish trends carried over from the summer months.
• With the near-term outlook capped by the 1.1860 (161.8% expansion) region, a break/close below the 1.1580 (100% expansion) hurdle raises the risk for a move back towards 1.1480 (78.6% expansion) to 1.1500 (78.6% expansion) followed by the Fibonacci overlap around 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion).
• However, the pair may stage a more meaningful rebound from channel supports as the RSI struggles to push into oversold territory, with the first hurdle coming in around 1.1670 (50% retracement).
• Interim Resistance: 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion)
• Interim Support: 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion)

EUR/USD Retail Sentiment

Retail trader data shows 40.8% of traders are net-long EUR/USD with the ratio of traders short to long at 1.45 to 1.

The number of traders net-long is 2.9% lower than yesterday and 0.6% higher from last week, while the number of traders net-short is 9.3% higher than yesterday and 0.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.