Trading US Inflation with EUR/USD: Five scenarios, market bias and levels to watch

To taper or not to taper, and by how much? Those are the questions for the Federal Reserve and for the dollar – and the Core Consumer Price Index (Core CPI) for September can provide some answers. 

Quick CPI Background

In September, the Fed signaled it would taper its $120 billion/month bond-buying scheme in November, I everything is OK. But, Nonfarm Payrolls were weak, with only 194,000 jobs gained. Several silver linings convinced analysts that tapering remains on track, but doubts persist. Core inflation is critical 

Strong inflation is positive for the dollar, as it would imply imminent tapering and perhaps at an aggressive pace, if price rises are significantly high. Weak inflation would set expectations for a slow tapering or even a delay until December. More dollar printing is adverse for the currency.

Sentiment and Levels

Investors are worried about several developments and that favors the dollar. In the context of inflation, soaring prices of natural gas, coal and oil are weighing on Europe, China, and also the US. Authorities in Beijing are still trying to orchestrate a soft landing for Evergrande, the Chinese construction giant which has yet to stabilize its debt. 

The US debt ceiling issue has only been kicked down the road while Democrats continue fighting among themselves over large infrastructure budgets. 

Overall, the dollar has an advantage.

Levels from top to bottom: 1.1610, 1.1590 (weekly high) 1.1570 (Tuesday's high point),1530 (2021 trough), 1.15 (psychological), 1.1460, 1.1410.

Five scenarios for EUR/USD

The economic calendar is pointing to a 4% Core CPI YoY in September, a repeat of August's figure. When economists expect the same figure, it implies any variation could have a significant impact.

1. Within expectations: Only a repeat of 4% would consist of an "as-expected" figure. In this scenario, EUR/USD would likely edge lower, given the positive dollar bias, but likely stick to the range.
2. Above expectations: An increase to 4.1% or 4.2% would likely give the dollar a boost, potentially sending EUR/USD below one support line.
3. Well above expectations: If Core CPI hits 4.3% or higher it would represent a substantial surge in inflation. Euro/dollar could lose two support lines.
4. Under expectations: A marginal miss with 3.8% or 3.9% would extend the trend of slowing price rises, and potentially halt the dollar. However, other factors would offset such a move and EUR/USD would likely remain in range.
5. Well below expectations: Core CPI of 3.7% or below would cause doubts about tapering and could send the currency pair under one resistance line.