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The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the annual rate of inflation to fall 1.9% in July, which would be the biggest decline since January 1950.

Trading the News: U.S. Consumer Price Index

What's Expected
Time of release: 08/14/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: -1.9%
Previous: -1.4%

Impact the U.S. Consumer Price Index report had over EURUSD for the past 2 months

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

June 2009

07/15/2009 12:30 GMT

-1.5%

-1.4%

+7

+29

May 2009

06/17/2009 12:30 GMT

-0.9%

-1.3%

+42

+98


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May 2009 U.S. Consumer Price Index

The annual rate of inflation in the U.S. plunged 1.3% in May from the previous year to mark the biggest drop in 60 years, and price pressures are likely to remain subdued throughout the second-half of 2009 as economic activity falters. At the same time, consumer prices increased 0.1% from April, led by a 3.1% rise in gasoline prices, and the rise in energy costs may hamper the outlook for private-sector spending as households face a weakening labor market paired with tightening credit conditions. Nevertheless, as the Federal Reserve maintains a dovish outlook for inflation and adopts policy tools beyond the interest rate to stimulate the ailing economy, fears of a protracted downturn may lead the central bank to ease policy further over the coming months in an effort to steer the world's largest economy out of its worst economic downturn in over half a century.

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What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market's directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How to Trade This Event Risk

The U.S. dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the annual rate of inflation to fall 1.9% in July, which would be the biggest decline since January 1950, and the weakening outlook for price growth could hamper expectations for higher interest rates as the Federal Reserve anticipates price pressures to ‘remain subdued for some time.' At the same time, the FOMC raised its outlook for consumer prices in June and increased its PCE inflation forecast to 1.0-1.4% from an initial projection of 0.6-0.9% in April however, as the central bank anticipates price pressures to hold below the 2% target until 2011, policymakers may keep borrowing costs on hold throughout the following year in an effort to support a sustainable recovery. A government report showed import price fell at an annual pace of 19.3% in July, which is the largest decline on record , while the PCE Deflator slipped 0.4% from the previous year to mark the biggest annual decline since the series began in 1960, and the slack in private-sector spending may continue to drag on the outlook for inflation as growth prospects falter. Nevertheless, producer prices jumped 1.8% during the same period, led by a 6.6% rise in energy costs, and the rise in input prices is likely to weigh on businesses as they face fading demands from home and abroad. Meanwhile, the Fed held borrowing costs at the record-low and maintained its $1.75T asset purchase program earlier this week, and went onto say that the interest rate will remain ‘exceptionally low' as economic activity is ‘likely to remain weak for a time.' Moreover, the statement said the improvement in the fundamental outlook ‘suggests that economic activity is leveling out,' but noted that the ‘prices of energy and other commodities have risen of late.' As global trade conditions remain weak, the rise in input prices may lead firms to scale back on production and employment throughout the second half of the year in order to reduce their cost structure, and firms may pass along the increase onto consumers as policymakers see a risk of a slower recovery.

A weakening outlook for inflation favors a bearish outlook for the greenback but nevertheless, an enhanced CPI reading could reinforce long-term expectations for higher interest rates in the U.S., and price action following a better-than-expected release could set the stage for a long dollar trade. Therefore, if price growth declines at an annual rate of 1.0% or less, we will look for a red, five-minute candle subsequent to the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first objective. Our second target will be based on discretion, and we will push the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

In contrast, the slump in private consumption paired with a weakening outlook for price growth is likely to hamper the prospects for a sustainable recovery, and price action following a dismal CPI reading could trigger a sell-off in the greenback as investors weigh the outlook for future policy. As a result, if the annual rate of inflation falls 1.9% or greater in July, we will favor a bearish forecast for the reserve currency, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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