EUR/USD is rising after US retail sales beat estimates

EUR/USD is recovering strongly to 1.0740 as slower-than-expected growth in US retail sales data for May weighs on the US dollar.
U.S. retail sales rose slightly by 0.1%, below estimates of 0.2%, after remaining flat in April.
ECB policymakers remain concerned as the inflation outlook appears uncertain.

At Tuesday’s session in New York, the EUR/USD rate rebounded to around 1.0740. The major currency pair is seeing buying interest as slower growth in the United States (US) monthly retail sales data for May weighs on the US dollar (USD). The U.S. Census Bureau said retail sales figures – a key measure of household spending – rose at a slower pace of 0.1% from expectations of 0.2%. In April, retail sales remained stable.

Lower-than-expected growth in retail sales data was expected to put significant pressure on the US dollar, increasing investor confidence that the disinflation process would continue. Currently, the U.S. Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is retreating all its intraday gains and falling to near 105.30. Weak retail sales data would also prompt the market to see the Federal Reserve (Fed) cut interest rates twice this year.

CME’s FedWatch tool indicates a greater likelihood that interest rates will begin to decline from the September meeting, with further cuts coming in November or December. On the contrary, upbeat retail sales data will strengthen the attractiveness of the US dollar and force investors to consider betting on interest rate cuts in September.

Meanwhile, Fed policymakers maintain the argument that there will only be one rate cut this year. Officials acknowledged that the process of bringing inflation down to the desired 2% level had resumed after the Consumer Price Index (CPI) report for May showed that price pressures had eased more than expected. While the supple CPI report came as a relief to policymakers, they wanted inflation to decline for several months before the policy normalization process began.

On Monday, Fed Bank of Philadelphia President Patrick Harker supported keeping interest rates at current levels to maintain downward pressure on inflation across sectors such as housing and services, especially insurance and auto repair. Asked about the interest rate outlook, Harker predicts one cut in the benchmark rate this year if his economic forecast comes true, Reuters reported.

Daily market recap: EUR/USD rebounds as US dollar erases intraday gains

EUR/USD is back near 1.0740 as monthly U.S. retail sales data for May grew slower than expected. However, the euro is lagging due to political turmoil in France
The euro has been under pressure since French President Emmanuel Macron called for early elections after the centralist alliance suffered defeat in the European Parliament elections by Marine Le Pen’s (RN) National Rally. Investors fear that the formation of the Supervisory Board government will trigger a financial crisis in the second largest economy of the European Union (EU). In its manifesto, the National Council promised a lower retirement age, reductions in energy prices, greater public spending and a “France first” economic policy.
On the monetary policy front, European Central Bank (ECB) policymakers remain committed to keeping interest rates steady in the near term as an aggressive easing approach could re-increase price pressures. At its June meeting, the ECB cut the deposit rate by 25 basis points (bps) for the first time since 2019 amid continued higher price pressure due to the Covid pandemic and the Russia-Ukraine war.
On Monday, ECB Chief Economist Philip Lane stressed that interest rates will be kept at current levels in the coming months. Lane added that he wants disinflation in the services sector to last longer than a month to further ease policy.

Technical Analysis: EUR/USD Remains Below 200-Day EMA

EUR/USD is under pressure as it tries to break through the immediate resistance at 1.0740. The downward-sloping border of the Symmetrical Triangle formation on the daily time frame, drawn from the December 28, 2023 high at 1.1140, is the main barrier for euro zone bulls.

The major currency pair is expected to find support at 1.0636, near the rising chart trendline plotted from the October 3, 2023 low at 1.0448, and the horizontal cushion plotted from the April 16 low near 1.0600.

The long-term outlook for the common currency pair also turned negative as prices fell below the 200-day exponential moving average (EMA), which is around 1.0800.

The 14-period relative strength index (RSI) falls below 40.00. Should momentum turn bearish if it continues below the same level?