EUR/USD: Trading the Eurozone CPI Jan 2014

Eurozone CPI Flash Estimate, released monthly, is an inflation index which measures the change in the price of goods and services charged to consumers. A reading which is higher than the market forecast is bullish for the euro.

Here are all the details, and 5 possible outcomes for EUR/USD.

Published on Tuesday at 10:00 GMT.

Indicator Background

Analysts consider CPI one of the most important economic indicators, and the release of the  Eurozone CPI Flash Estimate can affect the direction of  EUR/USD.

Eurozone inflation in 2013 was well below the ECB target of 2%, leading to rate cuts which have lowered the benchmark rate to a record 0.25%. Eurozone Flash Estimate CPI  rose to 0.9% in November, up from 0.7% the month before. The estimate for the December reading stands at 0.9%.

Sentiments and levels

It’s back to reality after the holidays, and the picture is not a bright one for the Eurozone as we move into 2014. Tighter credit conditions in the Eurozone are weighing on growth and could send the  bloc back to recession. With weak inflation and growth,  a negative interest (certainly a possibility in Q1) is a serious possibility.

In the US, the situation is considerably brighter. Unemployment Claims have dropped nicely and Non-Farm Payrolls could give the greenback another boost and raise expectations of an accelerated QE taper, which would  bolster the dollar.  The breakdown of support and the return to the lows seen in December are also a warning sign. Thus, the overall sentiment is bearish on EUR/USD towards this release.

Technical levels, from top to bottom: 1.38, 1.3710, 1.3615, 1.3440, 1.3320, and 1.3240.

5 Scenarios

1. Within expectations: 0.7% to 1.1%. In this scenario, EUR/USD could show some slight fluctuation, but it is likely to remain within range, without breaking any levels.
2. Above expectations: 1.2% to 1.6%: A stronger reading than predicted could push the pair above one resistance line.
3. Well above expectations: Above 1.6%: An unexpectedly sharp rise in inflation could push EUR/USD upwards, with  a second  resistance line at risk.
4. Below expectations: 0.2% to 0.6%: A lower than expected reading could pull the pair downwards, with one support level at risk.
5. Well below expectations: Below 0.2%: A  very low reading  could result in the pair breaking a second support level.

For more on the euro, see the EUR/USD forecast.

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