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CPI

EURUSD Spikes Above 1.1000 After CPI Data

The EUR/USD pair maintained its position above 1.1000 following the release of US inflation data on 10/08/2023

CPI data had a significant impact on the currency pair as it provided insights into the health of the US economy and the potential direction of monetary policy by the Federal Reserve.

Despite a brief spike above 1.1050, the pair retraced some of its gains as the Consumer Price Index (CPI) and Core CPI came in slightly lower than expected.

This prevented the USD from strengthening further and allowed the EUR/USD pair to hold onto its daily gains.

Technical Analysis

Euro / US Dolar

Looking at the daily chart of the EUR/USD pair, we can observe several key technical indicators and levels that provide insights into the market sentiment and potential price movements.

The pair encountered resistance around the 20 Simple Moving Average (SMA), suggesting a mildly bearish trend in the near term. However, it is important to note that technical indicators are showing signs of improvement, although they have not yet crossed their midlines.

The 100 SMA is trending upwards well below the current level, providing dynamic support around 1.0025. This indicates that there is still buying interest in the market and that the pair is currently in a corrective phase.

Additionally, the pair is trading above the 61.8% Fibonacci retracement of the 1.0833/1.1275 rally at 1.1005, which adds further support to the notion of a potential uptrend. However, it is worth mentioning that the pair remains below the 50% retracement level at 1.1055, which serves as a crucial resistance level. A break above this level could lead to further gains for the EUR/USD pair.

Zooming in to the 4-hour chart, we can get a clearer picture of the short-term price action and momentum of the EUR/USD pair. Here, we can observe a slightly bullish bias, although momentum appears to be limited at the moment.

Technical indicators are moving higher within positive territory, indicating some buying pressure, but they are also losing some of their initial strength, suggesting a potential slowdown in upward momentum.

The pair has managed to recover above the directionless 20 and 200 Simple Moving Averages (SMAs), indicating a shift towards a more positive sentiment in the short term. However, it is currently facing resistance from the bearish 100 SMA, which could potentially limit further upside movement.

Traders and investors should closely monitor the interaction of price with these moving averages and the behavior of technical indicators for potential trading opportunities.

The EUR/USD pair has managed to hold above the key psychological level of 1.1000 following the release of US inflation data. The technical analysis of both the daily and 4-hour charts suggests a potential for further gains, with the 50% Fibonacci retracement level at 1.1055 serving as a critical resistance level to watch.

However, it is important to keep in mind that market conditions can change rapidly, and traders and investors should stay updated with the latest news, economic data, and central bank announcements to make informed decisions.

US Inflation Rises to 3.2% in July, Slightly Below Expectations

According to the US Bureau of Labor Statistics (BLS), inflation in the US, as measured by the Consumer Price Index (CPI), increased to 3.2% on a yearly basis in July. While slightly below market expectations of 3.3%, this marks a rise from 3% in June.

The publication also revealed that Core CPI inflation, which excludes volatile food and energy prices, decreased to 4.7% from 4.8%.

On a monthly basis, both the CPI and Core CPI rose 0.2%, in line with analysts’ estimates.

Notably, the BLS explains that the increase in the index for shelter and motor vehicle insurance was the main contributor to the monthly rise in all items.

Additionally, the food index saw a 0.2% increase in July, following a 0.1% increase the previous month.

Immediate Market Impact: US Dollar Falls, Wall Street Set for Bullish Opening

As news of rising inflation breaks, the US Dollar faced strong selling pressure, causing the US Dollar Index to drop below 102.00. Meanwhile, US stock index futures remain in positive territory, indicating a bullish opening for Wall Street. The 10-year US Treasury bond yield remains steady at around 4%.

FAQs about CPI and its Impact on Currency Trading

What is the Consumer Price Index (CPI) and why is it important in currency trading? 

The CPI is a measure of inflation that calculates the weighted average of prices for a basket of consumer goods and services. It is important in currency trading because it affects decisions made by central banks regarding monetary policy, which can impact the value of a currency.

How does inflation affect interest rates set by central banks?

When inflation is too low, central banks may cut interest rates to stimulate economic activity. Conversely, when inflation is too high, interest rates may be raised to stabilize prices. Interest rate changes can influence consumer behavior and impact the strength of a currency.

Why do forex traders pay attention to the monthly CPI figure? 

Forex traders monitor the CPI as it is a key indicator of inflation levels. Central banks use inflation targets to guide their monetary policy decisions, including interest rate adjustments. Changes in interest rates can significantly impact currency values in forex trading.

How does the CPI impact the value of the US dollar in forex trading?

The release and revisions of the CPI figure by the US Bureau of Labor Statistics can produce swings in the value of the US dollar against other currencies globally. If the CPI indicates higher-than-expected inflation, the Federal Reserve may raise interest rates to curb spending, strengthening the US dollar.

What is the significance of Core CPI in forex trading? 

Core CPI measures inflation excluding the volatile energy and food sectors. It provides a clearer look at underlying inflation trends. Forex traders consider both CPI and Core CPI figures important indicators of an economy’s performance and use them to anticipate central bank actions and the impact on currency pairs.

How do revisions in CPI figures affect currency values? 

CPI figures, like other government data, are subject to revisions by economists. Revisions can lead to significant volatility in currency values as market expectations and perceptions of an economy’s inflationary pressures change.

Why is the CPI important for companies with global operations? 

Currency strength or weakness resulting from CPI-related factors can impact the earnings performance of companies operating in multiple global markets. Exchange rate fluctuations influenced by CPI can affect the profitability and competitiveness of these companies.

How frequently is the Consumer Price Index (CPI) released? 

The CPI is typically released on a monthly basis by government statistical agencies, providing updated inflation data for economists, policymakers, and currency traders.

What are some factors that can influence the CPI figures? 

 Various factors can impact CPI figures, including changes in energy prices, food costs, housing expenses, transportation costs, and overall consumer spending patterns. These factors can cause fluctuations in the CPI and subsequently impact currency trading.

Are there different types of CPI measurements used around the world?

Yes, different countries may use their own variations of the CPI. For example, in the United States, there are different CPI measures, such as the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which focus on different demographic groups.

Can CPI data from one country affect the currency of another country?

Yes, CPI data from one country can have a spillover effect on the currency of another country. In a globally interconnected economy, currency values can be influenced by international trade flows, investor sentiment, and expectations regarding inflation rates in different countries.

How do forex traders incorporate CPI data into their trading strategies?

Forex traders analyze CPI data to assess the overall health of an economy and anticipate potential changes in monetary policy. They use this information to make informed decisions regarding currency pairs and position themselves for potential market movements.

Are there any limitations or criticisms of the CPI as an inflation measure?

The CPI has faced criticism for various reasons. Some argue that it may not accurately reflect the cost of living for all individuals and may not adequately account for changes in quality or substitutions made by consumers. It is important for traders and economists to consider these limitations when interpreting CPI data.

Can geopolitical events impact the relationship between CPI and currency trading? 

Yes, geopolitical events such as trade disputes, political instability, or natural disasters can introduce volatility and uncertainty into currency markets. These events can influence the relationship between CPI data and currency trading, creating additional factors that traders need to consider.

FAQs about the U.S. Dollar Index (USDX)

What is the U.S. Dollar Index (USDX)? 

The U.S. Dollar Index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.

Which currencies are included in the USDX? 

The six currencies included in the USDX are the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

When was the USDX established? 

The USDX was established by the U.S. Federal Reserve in 1973 after the dissolution of the Bretton Woods Agreement.

Who maintains the USDX? 

The USDX is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE).

Has the USDX been updated since its establishment? 

The USDX has only been updated once, in 1999, when the euro replaced several European currencies in the index.

What does the value of the USDX indicate? 

The value of the USDX is a fair indication of the dollar’s value in global markets.

How is the USDX calculated? 

The USDX is calculated by factoring in the exchange rates of the six foreign currencies included in the index.

What is the history of the USDX? 

The USDX has experienced significant fluctuations throughout its history, reaching an all-time high in 1984 and an all-time low in 2007.

What factors affect the USDX?

The USDX is affected by macroeconomic factors such as inflation/deflation, recessions, and economic growth in the currencies included in the index.

How can the USDX be traded? 

Traders can monitor the value of the USD compared to the basket of currencies using the USDX. It is also possible to incorporate futures or options strategies on the USDX and trade through ETFs or mutual funds.

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Author

  • Zahari Rangelov

    Zahari Rangelov is an experienced professional Forex trader and trading mentor with knowledge in technical and fundamental analysis, medium-term trading strategies, risk management and diversification. He has been involved in the foreign exchange markets since 2005, when he opened his first live account in 2007. Currently, Zahari is the Head of Sales & Business Development at TraderFactor's London branch. He provides lectures during webinars and seminars for traders on topics such as; Psychology of market participants’ moods, Investments & speculation with different financial instruments and Automated Expert Advisors & signal providers. Zahari’s success lies in his application of research-backed techniques and practices that have helped him become a successful forex trader, a mentor to many traders, and a respected authority figure within the trading community.