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EUR/USD Rally to Fizzle on Strong U.S. Retail Sales

EUR/USD Rally to Fizzle on Strong U.S. Retail Sales

David Song, Shuyang Ren,

- U.S. Advance Retail Sales to Rebound Following the Unexpected Contraction in June.

- Household Spending Has Failed to Grow Five Out of the Past Seven-Months.

For more updates, sign up for David's e-mail distribution list.

Trading the News: U.S. Advance Retail Sales

A 0.6% rebound in U.S. Retail Sales may boost demand for the greenback and spur a near-term pullback in EUR/USD as a pickup in private-sector consumption fuels expectations for a Fed rate hike at the September 17 interest rate decision.

What’s Expected:

EUR/USD Retail Sales

Click Here for the DailyFX Calendar

Why Is This Event Important:

Indeed, data pointing to a stronger recovery may keep the Fed on course to remove the zero-interest rate policy (ZIRP) in 2015 especially as the central bank sees the U.S. economy approaching full-employment, but another unexpected slowdown in household spending may further delay the normalization cycle as Chair Janet Yellen and Co. struggle to achieve the 2% target for inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Credit (JUN)

$17.000B

$20.740

Labor Market Conditions Index (JUL)

1.0

1.1

Unemployment Rate (JUL)

5.3%

5.3%

The expansion in private-sector credit along with the ongoing improvement in the labor market may generate a marked rebound in retail sales, and the Fed may show a greater willingness to lift the benchmark interest rate off the record-low as the economy gets on a more sustainable path.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings (YoY) (JUL)

2.3%

2.1%

Employment Cost Index (2Q)

0.6%

0.2%

Consumer Confidence (JUL)

100.0

90.9

However, waning confidence paired with subdued wage growth may drag on consumption, and another dismal sales report may undermine the Fed’s expectations for a stronger recovery, which could ultimately lead to a further delay of the normalization cycle.

Join DailyFX on Demand for Real-Time Updates on the DailyFX Speculative Sentiment Index (SSI)!

How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. Retail Sales Rebounds 0.6% or Greater

  • Need red, five-minute candle following a positive print to consider a short EUR/USD trade.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/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.

Bearish USD Trade: Private-Sector Consumption Continues to Disappoint

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

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook for EUR/USD remains bearish as the Fed remains on course to normalize policy, but the pair may continue to consolidate over the near-term as it retains the triangle/wedge formation from earlier this year.
  • DailyFX Speculative Sentiment Index (SSI)shows the retail crowd remains net-short EUR/USD since March 9, but the ratio is approaching extremes as it slips to -2.63, with 28% of traders long.
  • Interim Resistance: 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement)
  • Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% expansion)

Read More:

Price & Time: USD/MXN - Still Up In The Air

EUR/USD Breaks Out- Targets to Watch Ahead of Greek Vote, 2Q GDP

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUN

2015

07/14/2015 12:30 GMT

0.3%

-0.3%

+10

-32

June 2015 U.S. Advance Retail Sales

EUR/USD Chart

U.S. Retail Sales unexpectedly declined 0.3% in June, while the previous month’s print was also revised lower to reflect a 1.0% increase from an initial print of 1.2%. The decline was largely driven by a 1.6% in demand for future, while discretionary spending on clothing dipped 1.5% during the same period. Even though the Federal Reserve remains on course to raise the benchmark interest rate in 2015, the ongoing weakness in private-sector consumption may further delay the normalization cycle as it remains one of the leading drivers of growth and inflation. Nevertheless, the initial market reaction was short-lived, with EUR/USD quickly snapping back from 1.1085, with the pair consolidating throughout the North American trade to end the day at 1.1006.

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

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

To be added to David's e-mail distribution list, please follow this link.

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