U.S. Core Inflation Gets Higher, Retail Sales Rise, Buy EUR/USD

 | Nov 16, 2017 07:34AM ET


EUR/USD: U.S. core inflation gets higher, retail sales rise
Macroeconomic overview:

  • Underlying U.S. consumer prices increased in October on the back of a pickup in rents and healthcare costs, bolstering the view that a recent disinflationary trend worrying the Federal Reserve probably had ended.
  • The rise in the consumer price index, excluding the volatile food and energy categories, reported by the Labor Department on Wednesday likely clears the way for the U.S. central bank to raise interest rates next month.
  • October's gain in the so-called core CPI, which measures underlying inflation pressures, could comfort Fed officials concerned that stubbornly low inflation may reflect not only temporary factors but also more persistent developments.
  • The core CPI rose 0.2% mom and 1.8% yoy in October. It edged up 0.1% mom and 1.7% yoy in September.
  • The data suggest the Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, probably rose 0.2% in October, which would snap five straight monthly 0.1% gains. That would raise the year-on-year increase in the core PCE price index to 1.4 % from 1.3% in September.
  • The core PCE price index has consistently undershot the Fed's 2% target for more than five years. The central bank has lifted borrowing costs twice this year and has projected three rate increases in 2018. The government will publish core PCE price index data later this month.
  • Overall consumer prices, however, rose marginally in October as the boost to gasoline prices from hurricane-related disruptions to Gulf Coast oil refineries was unwound. The CPI nudged up 0.1% last month after jumping 0.5% in September. That lowered the year-on-year increase in the CPI to 2.0% from 2.2% in September.
  • Low inflation is, however, helping to underpin consumer spending. In a separate report on Wednesday, the Commerce Department said retail sales increased 0.2% last month as heavy price discounting by automobile manufacturers buoyed purchases of motor vehicles. Data for September was revised to show sales jumping 1.9%, which was the largest gain since March 2015, rather than the previously reported 1.6% advance. Retail sales increased 4.6% on an annual basis.
  • The slowdown in retail sales from September's robust pace largely reflected an unwinding of the boost to building materials and gasoline prices after recent hurricanes.
  • Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.3% last month after climbing 0.5% in September. These so-called core retail sales correspond most closely with the consumer spending component of GDP. Last month's increase in core retail sales indicated a healthy pace of consumer spending at the start of the fourth quarter.
  • Boston Fed President Eric Rosengren said falling unemployment and sustained growth mean the U.S. economy has accelerated beyond a sustainable level so the Federal Reserve should continue to raise interest rates, including next month.
  • The data stopped a severe USD correction from the uptrend that began in early September on hopes of a tax cut deal.
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Technical analysis and trading signals:

  • We see a shooting star pattern on candles after Wednesday’s sharp fall from 1.1862. Failure inside the cloud and the close back below suggest further pullback action is due.
  • Underlying trend is bullish so use dips as fresh buying opportunities. We stay long at 1.1714 for 1.1960.