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The release of the American Consumer Price Index is a key indicator for future monetary policy, it always rocks currencies and provides a trading opportunity. Here are the details and 5 scenarios for the outcome and the impact on EUR/USD.

Indicator Background

Inflation has become a key issue all over the world and pushes interest rates higher. The European Central Bank joined emerging economies and began a hiking cycle a week ago. The move came after headline CPI reached an annual pace of 2.6%. Expectations for this move sent EUR/USD significantly higher towards this move.

In the US, inflation is more tame, the Federal Reserve watches core inflation more closely and the Federal Reserve also has to keep an eye on employment. Contrary to the ECB, it has a dual mandate. Nevertheless, quite a few members of the FOMC have expressed concern about rising inflation and the need to end the quantitative easing program on time, in June, or even beforehand. Some members even left the door open for a rate hike during 2011, talks that weren't heard beforehand.

In February, the CPI rose by 0.5%, as expected, and Core CPI rose by 0.2%, slightly higher than expected. A repeat of the same numbers is expected now, pushing the annual pace of price rises slightly higher. As the Federal Reserve eyes Core CPI, it has a higher weight in the reaction.

Sentiment and Technical Levels

The debt crisis in the eurozone returned to the limelight as talks about a Greek default are intensifying and elections in Finland loom over the upcoming bailout for Portugal. Recent US figures, such as unemployment claims, have been too good either, but the sentiment is slightly bearish on EUR/USD.

Levels to watch out for, from top to bottom: 1.4580, 1.4520, 1.4450, 1.4370, 1.4282 and 1.4160.

Scenarios:

  1. Within expectations: a rise of 0.4%-0.6% in CPI and 0.1%-0.2% in Core CPI. EUR/USD shakes and might tick very marginally down.
  2. Above expectations: a rise of 0.5%-0.7% in CPI, and 0.3% in Core CPI. In this case EUR/USD is likely to fall within rnage, with a small chance of breaking below support.
  3. Well above expectations: A rise of 0.7% or more in CPI, and a rise of 0.4% or more in Core CPI - EUR/USD is likely to drop, with a good chance of breaking below support.
  4. Below expectations: A rise of 0.2%-0.4% in CPI, and a rise of 0.1% in Core CPI. In this case, the dollar will ease, with EUR/USD rising within range.
  5. Well below expectations: A rise of 0.2% or lower in CPI and no rise, or even a drop in Core CPI. In this case, EUR/USD is expected to rise, with a chance of breaking above resistance.

This event is likely to set the tone for the end of the week, and to overshadow other indicators.

Source: EUR/USD - Trading the U.S. CPI Release