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US CPI, Ireland's Rejection of EU Treaty Weigh On EUR/USD

Since the start of the currency trading portion of the contest just over three weeks ago, contestant number 1 has made over $170,000, as he ended Thursday with a portfolio balance of $271,770.58. Indeed, the leader has held the top spot for the past 4 days, as his portfolio is ahead by approximately $76,000, which will make it difficult for other traders to take his place. His strategy of focusing on USD/JPY, EUR/USD, and GBP/JPY and holding positions for 1-5 days appears to be working well for him. As we mentioned in yesterday’s Currencies Update, contestant number 1 entered a long USD/JPY position on Wednesday evening just below 107. The pair has since rallied over 100 points, but it remains to be seen how USD/JPY and the other yen crosses will hold up over the course of the day given the release of the US Consumer Price Index this morning.

Headline CPI was stronger than expected in May, as the index jumped 0.6% – the biggest single month gain since November 2007 – while the annual measure hit a 4-month high of 4.2%. Unsurprisingly, the increases were led by energy prices, which were up 4.4% during the month and have surged 17.4% from a year earlier. On the other hand, core CPI – which excludes food and energy prices – only rose 0.2% during May while the annual measure held steady at 2.3%. Overall, this data will only add to the Federal Reserve’s inflation concerns, and futures continue to price in a 20% chance of a 25 basis point rate hike to 2.25% at the end of the month. This sort of sentiment is inherently dollar bullish, however, the news could be bearish for US stock markets and thus, negative for the yen crosses. Indeed, we tend to see a correlation between pairs like USD/JPY and EUR/JPY and the DJIA.

One place we could see the dollar bullish sentiment come into play is in GBP/USD, which is the one position contestant number 2 is holding. This trader ended Thursday with a portfolio balance of $194,915.71, due primarily to multiple short-term trades in the pair. Contestant number 2 sought to capitalize on the US CPI data and sold GBP/USD after the release. The pair has gone little changed since the pair initially dropped from 1.9450 toward 1.9415, and this position could make or break this traders spot in the top 3.

Meanwhile, like GBP/USD, we saw EUR/USD respond immediately to the US CPI data as the greenback surged, but the pair has simply consolidated between 1.5315 – 1.5350 since then. Contestant number 3, who ended Thursday with a portfolio balance of $192,907.14, actually bought EUR/USD near 1.5330 early this morning as the pair stabilized following sharp declines during the European trading session. While it is possible that EUR/USD could rebound, there are substantial fundamental factors weighing the pair down. First, of course, is the stronger-than-expected US inflation data. Next, the euro is currently grappling with news that Ireland’s referendum on the Lisbon Treaty has resulted is a “no” vote. Approval of the Lisbon Treaty would have streamlined governance of the EU, as it would create an EU president and foreign minister, and reduce the EU Commission from 27 to 18 members with rotating membership in order to speed up the commission's work. The rejection of the Treaty could spark a bit of political turmoil in the Euro-zone, which is never a good thing for a currency. However, the final results from the country's 43 constituencies are not due until later in the afternoon, so this may be a story worth watching.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com