CPI - Good and Bad News for U.S. Economy - Profiting with Forex (PFX)

CPI - Good and Bad News for U.S. Economy

By John Jagerson, 15 May 2007

CPI in the U.S. came out this morning with some good numbers. I say "good" from the perspective that we are seeing some easing of inflation overall, which is in-line with a cooling economy. I would be very worried if inflation was spiking. The mild decline in inflation also makes it less likely for the Fed to raise interest rates. The stock market responded well to this because it keeps the cost of financing and expansion low in the corporate world. However, the lower possibility of interest rate increases has pushed the USD down significantly today.

Daily EUR/USD - Reaction to the CPI release

We have been yelling about the USD/CAD lately on the site and that is still looking good for shorts. The EUR/SUD spiked up nicely and we even got some downward movement on the USD/JPY reflecting a weak dollar. That breaks the correlation we have seen between the USD/JPY and the equity markets as the Dow Jones Industrial Average hit another all time high today. We will have to watch carefully to see if this continues to diverge because it could be a great breaking point for shorts to enter the USD/JPY.

The bottom line is that stock traders like the news because it will keep costs low and forex traders like the news because it has kicked loose some stalled trends. However, it is ultimately bad news for the U.S. economy in the intermediate term as it is further evidence of a slowing economy.

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