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How to trade the US CPI release?

Today’s CPI report is probably going to be a significant market mover. Analysts expect to see the annual headline CPI easing by 0.3% to 7.9%. This means we have an opportunity for a dollar bullish surprise. In other words, the markets might have already priced in the CPI dip and if the number is higher than expected then the future scenarios change. But as we don’t know a) what the inflation rate  is or b) what the market reaction to the number is going to be so we need to trade the price action as we see it unfolding. The markets tend to trade from one technical level to another when there’s no new surprising information coming out.

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However, when there is market operators need to make major adjustments to their portfolios. This creates trading opportunities but it also means pre-planning your trades is very challenging if not impossible. It’s better just to map out the key price levels for each of the markets you are planning to trade and then take trades against those levels as you see how price reacts to the levels.

DJ chart 11 10

DJ broke its three-day bullish streak yesterday. The weekly trend channel high at 33400 was probably the reason as it means the market is overbought around the current price levels and the risk of the weekly bear trend resuming its course has increased. In the daily and 8h charts, the market, however, is still in an uptrend until the 31713 low is violated. Above this level, we have a bull channel low (currently) at 32019. So the 31713 – 32019 range is a potential support area. Below this range DJ is likely to trade down to the 30800 region. The 32825 level is the nearest key resistance level and above it, we have the latest high and the weekly channel high at 33358.

EURUSD chart 11 10

EURUSD has broken out of a long-term bear trend but is now trading near a resistance level (1.0093)  that coincides with a short-term bull channel high. The bulls have recently defended the 0.9976 level but if today’s CPI number is high then the level is likely to break and we might see a move towards levels near the bull channel low (0.9765). If the 1.0093 can’t be penetrated decisively the market creates a double top in the 8h chart. This would increase the risk of EURUSD pushing below the bull channel low. If the CPI number was substantially higher than expected then it would be highly likely that recently seen bullishness in EUR against the dollar would vanish and we’d see a deeper correction. But, let’s wait and see what the CPI release is going to be like. The analyst expectation is that the annual CPI will come in at 7.9% (0.3% lower than a month ago).

Gold chart 11 10

Gold bulls are taking a breather after the strong rally that followed the range breakout I alerted you to. Trading that breakout was difficult as it was so sudden. A buy stop above the range high would have probably been the best option as the move was so violent. My preferred way of trading a breakout is to buy a retracement back to an S&R level. This time the strategy didn’t work. But let’s get to today’s CPI release and how to trade it in gold. First of all the market is trading relatively close to the high of the wide range I’ve been talking about. At the same time, the market is trying to break out of a medium-term bear channel. Often these breakouts happen in stages so we could see a retracement lower before the breakout is complete. If there’s a surprise and the dollar rallies strongly following the CPI, then we should see a push lower in gold. This could bring the small range at 1666 – 1682 into play again. 

USOIL chart 11 10

USOIL was weak and moved to 86.30 as expected. I estimated yesterday that the fast move lower might have scared the bulls. This turned out to be the case and now the market trades at a key 8h support level at 84.76. The oil market has been pretty easy to read lately but now it’s a bit tricky to estimate what might happen next. USOIL is getting oversold but we need to see the bulls coming in before we buy. Otherwise, we’d be buying a falling knife. My philosophy when it comes to trading is that we should follow the big money. If the big money is buying then we see that in the price action and all we have to do is to find a way to participate in the move. If the big money is selling or does nothing then that’s also evident in the price action and we should trade accordingly. The nearest resistance is at 86.94 while the nearest untouched support is at 82.37.

 The Next Main Risk Events

  • CHF Gov Board Member Maechler Speaks
  • USD Unemployment Claims
  • CAD BOC Gov Macklem Speaks
  • USD FOMC Member Mester Speaks
  • USD FOMC Member George Speaks
  • GBP Prelim GDP
  • EUR EU Economic Forecasts
  • CHF SNB Chairman Jordan Speaks
  • USD Prelim UoM Consumer Sentiment
  • USD Prelim UoM Inflation Expectations

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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