EUR/USD analysis: Euro held back on soft EZ data ahead of Powell

• EUR/USD analysis: Focus turns to Fed and Powell
• Eurozone retail sales fall yet again
• EUR/USD key levels to watch is in the 1.0635-1.0667 range

Following last week’s impressive rally, the EUR/USD was down for the third day at the time of writing on Wednesday afternoon. It was held back by the fact we have seen further deterioration in Eurozone data. The US dollar index was up for the third day, further eating into last week’s drop. The lack of any major news has allowed the dollar to simply drift higher again, with the market probably needing more evidence on the data front before further pushing on with the Fed peak rates narrative. But will the Fed Chair give the dollar bears something to cheer later on, just as the EUR/USD has dipped to test a key short-term support area?

EUR/USD analysis: Focus turns to Fed and Powell

Traders are sitting on their hands and awaiting direction from Fed speakers. In particular, they want to know how hard or otherwise Fed officials, especially Chairman Powell, will push back against the recent weakening of US financial conditions and data. If Powell and co choose not to emphasise the risk of further rate rises, then this could see the dollar come under renewed pressure, following last week’s data-driven sell-off. Powell is due to speak at 14:15 GMT, with several other FOMC officials including Cook, Williams, Barr and Jefferson also set to speak today. Powell will speak again on Thursday, when we also have US jobless claims data. UoM Consumer Sentiment will be released on Friday.

EUR/USD held back by weak Eurozone data

The run of soft Eurozone data continued for yet another day, although this is having progressively less influence on the EUR/USD’s direction. Today we saw Eurozone retail sales fall another 0.3% when a smaller decline was expected. This follows a 0.7% fall the month before, although initial estimates had been even larger (-1.2%). The last time retail sales grew was back in March, and even then, it was just +0.3% m/m. Since then, we have seen either negative or zero prints for each and every month, and in all cases the readings have been below expectations. Weak retail sales data clearly highlights the fact consumers are struggling with stagflation and high interest rates eating into their disposable incomes.

The retail sales data follows weaker German industrial production from the day before, which showed a steeper fall of 1.4% than expected (0.1%). It should be noted however that this merely aligns with weak manufacturing PMI data that had been released a couple of weeks ago. So, it was not totally shocking.

Nevertheless, the weakness in Eurozone data is holding the EUR/USD back for now. For this pair to start climbing higher again it will require a general dollar sell-off, which could be triggered by upcoming FedSpeak or data.

EUR/USD analysis: key levels to watch

Source: TradingView.com

The EUR/USD was testing a key support area at the time of writing around 1.0667, the top of the key 1.0635-1.0667 range. This level was the high from Thursday, which gave way following the weaker US data on Friday. With this level being previously resistance, we could see renewed strength come back into the EUR/USD after starting the week lower.

However, if there are no signs of the bulls in this 1.0635-1.0667 range, then the bulls will be in trouble again.

The dollar sold off last week on signs of peak interest rates in the US. We had a few data misses and comments from Fed officials to suggest that the tightening cycle is now done. Some investors have even started to look forward to interest rate cuts, and this was reflected in a sharp fall in bond yields. So far this week we haven’t seen any follow through in the selling pressure yet.

Investors are perhaps wary of the fact there are no major bullish catalysts this week, while the Fed is likely to throw caution to the wind with policymakers likely to dismiss talks of speedy interest rate cuts from the US central bank.

Has the dollar peaked?

Friday’s publication of a weaker US jobs report and ISM PMI data further cemented expectations that the Fed has reach peaked interest rates. Bond yields and the dollar sold off as the headline non-farm payrolls report was weaker compared to expectations, printing 150K and there were downward revisions to the prior month’s reading, underscoring the view that jobs growth is weakening as the impact of the Fed’s tightening works through the economy. 

Investors are wondering whether the trend of US data has now decidedly turned. The resilience of the US economy and the potential for inflation to remain high for longer is what drove the dollar to new highs for much of 2023. But in recent weeks have seen some signs of weakness in data. If the weakness turns into a trend, then we may well have seen the peak of the dollar. The NFP and ISM PMI data certainly pointed in that direction last week. The trouble is, though, that it is not just the US where economic data has deteriorated. The rest of the world, most notably China and the Eurozone, have been in an even prolonged period of soft data patch. In the land of the blind, the one-eyed man is king. So, the dollar may yet rebound because of a relatively better performance in data.

Meanwhile, it is possible that the dollar may find support from a possible bearish reversal in the stock markets, say because of weak company earnings or if the situation in the Middle East deteriorates to the point other oil-producing nations get militarily involved in the conflict. So, geopolitics remain a key risk factor to watch. But so far there hasn’t been any signs of a stock market reversal.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the company you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade