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EUR/USD Risks Larger Rebound on Dismal U.S. Retail Sales Report

EUR/USD Risks Larger Rebound on Dismal U.S. Retail Sales Report

David Song, Shuyang Ren,

- U.S. Advance Retail Sales to Contract for Second Consecutive Month.

- Will Lower Energy Prices Help Boost Private-Sector Consumption?

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Trading the News: U.S. Advance Retail Sales

Another contraction in U.S. Retail Sales may drag on the greenback and generate a near-term rebound in EUR/USD as it dampens the Fed’s scope to raise the benchmark interest rate in mid-2015.

What’s Expected:

EUR/USD Retail Sales

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Why Is This Event Important:

The Fed may have little choice but to further delay its normalization cycle as lower energy costs show little evidence of boosting private-sector consumption, and we may see the central bank implement a more dovish twist to the forward-guidance for monetary policy as it struggles to achieve the 2% target for inflation.

Expectations: Bearish Argument/Scenario

ReleaseExpectedActual
Consumer Credit (DEC)$15.000B$14.755B
Personal Spending (DEC)-0.2%-0.3%
Gross Domestic Product (Annualized) (QoQ) (4Q A)3.0%2.6%

The ongoing slowdown in private-sector lending may weigh on household consumption, and a dismal retail sales report may undermine the bullish sentiment surrounding the dollar as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

ReleaseExpectedActual
Non-Farm Payrolls (JAN)228K257K
Average Hourly Earnings (YoY) (JAN)1.9%2.2%
Personal Income (DEC)0.2%0.3%

Nevertheless, the pickup in job/wage growth may pave the way for a better-than-expected print, and a positive development may spark a bearish reaction in EUR/USD as market participants ramp up bets for higher borrowing-costs.

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How To Trade This Event Risk(Video)

Bearish USD Trade: U.S. Retail Sales Falls Another 0.4% or Greater

  • Need green, five-minute candle following the release to consider a long trade on EUR/USD.
  • If market reaction favors a bearish dollar trade, buy EUR/USD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bullish USD Trade: Private Consumption Exceeds Market Forecast

  • Need red, five-minute candle to favor a short EUR/USD trade.
  • Implement same setup as the bearish dollar trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily

USDOLLAR Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook for EUR/USD remains bearish as the RSI retains the downward trend carried over from back in October 2013.
  • Interim Resistance: 1.1600 pivot to 1.6110 (61.8% expansion)
  • Interim Support: 1.1096 (2015 low) to 1.1100 pivot

Read More:

AUDCAD Threatens Weekly Opening Range- Long Scalps Favored Above 9750

CADJPY Holding Trend Support, For Now

Impact that the U.S. Retail Sales report has had on EUR/USD during the previous month

PeriodData ReleasedEstimateActualPips ChangePips Change

DEC

2014

01/14/2014 13:30 GMT-0.1%-0.9%+30-1

December 2014 U.S. Advance Retail Sales

U.S. Retail Sales contracted 0.9% in December, largely driven by lower gas receipts, after climbing a revised 0.4% the month prior. Despite the worse-than-expected print, it seems as though the Fed remains confident in raising the benchmark interest rate in mid-2015 as the central bank anticipates falling oil prices to have a positive impact on the economy as it boosts disposable incomes. Nevertheless, the dollar struggled to hold its ground following the print, with EUR/USD climbing above the 1.1825 region, but the market reaction was short-lived as the pair consolidated throughout the North America trade to end the day at 1.1773.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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