Talking Points:
- EUR/USD may be vulnerable thanks to thin positioning.
- April US CPI tomorrow is critical to USDOLLAR Index rally continuing.
- Higher volatility in FX markets should have implications for your trading strategies.
There's been little net movement in the USDOLLAR Index today, but that'sbecause traders are getting ready for a very important data set release tomrorow. On the back of a weaker US Dollar and rising energy prices through the first four-plus months of the year, market participants are anxiously waiting to see if signs of rising price pressures turn up in the April US Consumer Price Index report, due out tomorrow at 12:30 GMT.
In recent days, US economic data has started to improve in meaningful areas, particularly for the consumer. Real spending is currently tracking at +3.7% annualized in Q2'16, which would provide a significant bump to growth. After Friday's release of the April US Advance Retail Sales report, the Atlanta Fed's GDPNow Forecast for Q2'16 improved to +2.8%.
Rising inflation pressures could be the key to convincing market participants that the Federal Reserve is seriously considering raising rates in June. Right now, that's not really on traders' minds - the Fed funds futures contract is still pricing in less than a 10% chance of a rate hike next month. With traders the least long the US Dollar in two years (and the least net-short EUR/USD over the same time period), any data that suggests that market is too dovish on the Fed's rate normalization path could catalyze more strength from the US Dollar (which would conveniently fit with the 20-year seasonality forecast for May).
See the above video for technical considerations in EUR/USD, USD/JPY, the USDOLLAR Index, Gold (CFD: XAUUSD), and Crude Oil (CFD: USOIL).
Read more: EUR/USD Continues to Ease Off - Market Least Short Since May 2014
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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