Can PPI prop up US economy? Cautious stage set for EURUSD

USD exchange rates were plunged yesterday on the back of US retail sales figure which was disappointing, printed at 0.0% MoM for April where consensus at 0.2%.

Whilst we know that Q1 GDP was poor in the US the assumption that Q2 would exhibit a strong recovery seems more questionable now. What is interesting is that US rates were largely unmoved with 10 year yields staying well above 2.25%.

And now PPI of April is scheduled to be released today, in US the Producer Price Index measures the average change in price of goods and services sold by manufacturers in the wholesale market. Producer Prices in the United States increased to 109.70 index points in last month from 109.50 index points in February of 2015. It's a leading macro indicator of consumer inflation when producers charge more for goods and services the higher costs are usually passed on to the consume.

We remain of the view that the EUR may lose the ground in coming months as investors sell their EUR denominated investments and take their holdings elsewhere. So, it's really a question of finding good entry levels for the short EUR-USD trade as the pair can only hang on PPI today and empire manufacture data tomorrow due for publication.

Technical & Derivatives Insights: (EURUSD)

This could certainly be deemed as a slightly upward but non directional for short term perspective as it may test few minor corrections to bounce back. However, clear uptrend on monthly charts is intact which means long term traders and hedgers should participate with a bullish mindset while trading this pair. 14 weeks Relative Strength Index is converging positively with early trend reversal signal on price. Shorter the time period, more sensitive the oscillator becomes and wider is its amplitude. While slow stochastic also signals oversold situation as blue (%K line) crosses over exactly below 20 levels.

On hedging front:

Keeping intermediate trend objective which is uptrend in this case, Call ratio spreads are recommended.

On verge of significant economic data release, this strategy is suitable as the pair is likely to remain either sideways or slightly bullish in our view.

Buying call spread in addition to selling more necked call options constitutes this hedging position. The portion should ideally be in the ratio of 1:2 or 1:3 with short time for expiry is preferred.

Breakeven will be at:  short strike price + difference in strike price + net credit