EUR/USD Risks Fresh Monthly Lows on Dismal Euro-Zone CPI

- Euro-Zone Consumer Price Index (CPI) to Slip Back to 0.3%- Lowest Since October 2009

- Core Rate of Inflation to Grow Annualized 0.7% for Second Consecutive Month

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

A further slowdown in the Euro-Zone’s Consumer Price Index (CPI) may heighten the bearish sentiment surrounding the EUR/USD as it puts increased pressure on the European Central Bank (ECB) to implement more non-standard measures.

What’s Expected:

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Why Is This Event Important:

There’s growing bets that the Governing Council may have little choice but to implement quantitative easing across the monetary union amid the growing threat for deflation, and the single currency remains at risk of facing additional headwinds in 2015 as the economic recovery remains subdued.

Expectations: Bearish Argument/Scenario

Waning confidence paired with the renewed weakness in private sector consumption may drag on price growth, and the growing risk for deflation may push the ECB to adopt more emergency measures in an effort to achieve its one and only mandate to deliver price stability.

Risk: Bullish Argument/Scenario

However, the CPI report may show sticky price growth in Europe as the region returns the growth, and a stronger-than-expected inflation print may trigger a more meaningful correction in EUR/USD as it mitigates the risk for deflation.

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How To Trade This Event Risk(Video)

Bearish EUR Trade: Euro-Zone CPI Slips to 0.3% or Lower

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

Bullish EUR Trade: Headline Reading for Inflation Tops Market Forecast

• Need green, five-minute candle to favor a long EUR/USD trade
• Implement same setup as the bearish Euro trade, just in opposite direction

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Potential Price Targets For The Release

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

• Will continue to look for lower highs & lows as the downward trending channel remains in play.
• Interim Resistance: 1.2610 (61.8% expansion) to 1.2620 (50% retracement)
• Interim Support: 1.2280 (100% expansion) to 1.2290 (38.2% expansion)

Impact that the Euro-Zone CPI report has had on EUR during the last release

October 2014 Euro-Zone Consumer Price Index

The Euro-Zone Consumer Price Index (CPI) rose an annualized 0.4% after expanding 0.3% in September, while the core rate of inflation unexpectedly slipped to 0.7% from 0.8% during the same period. Despite the rebound from a 5-year low, the weakening outlook for inflation may force the European Central Bank (ECB) to implement additional monetary support as the Governing Council struggles to achieve its one and only mandate for price stability. Despite the initial tick higher in EUR/USD, the single currency struggled to hold its ground during the North America trade as the pair ended the day at 1.2521.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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