EUR/USD analysis: Hot US inflation and rising oil prices support dollar

• EUR/USD analysis: Stronger-than-expected US PPI sends dollar and yields higher
• Crude oil rallies 2% to further fuel inflation concerns
• But US retail sales point to a struggling consumer which could limit dollar’s gains

After ignoring CPI data earlier in the week, the US dollar found the latest inflation data too hot to ignore this time. The greenback rallied across the board, causing gold to fall as PPI inflation came in higher than expected, while the breakout in crude oil prices further exacerbated concerns over inflation remaining high for longer. But with key central bank meetings to come next week and given how the dollar has behaved in recent past, i.e., struggling to hold onto its data-driven gains, are we going to see the greenback ease back down again? It is worth noting that retail sales missed expectations, and this may well keep the dollar’s gains in check.

EUR/USD analysis: PPI comes in hot

Earlier in the day, we saw the hottest annual PPI since September, while the core producer price ex transport remained above 5% for the third month, which is not exactly screaming rate cuts. As a result, the dollar and bond yields rose, which kept the EUR/USD under pressure along with other FX majors and gold.

• US PPI +0.6% m/m vs. +0.3% expected and last
• US PPI +1.6% y/y vs. +1.1% expected and +0.9% last

Meanwhile, today’s jobs market data – unemployment claims – beat expectations, adding to the strong NFP print on Friday. Initial Claims came in at 209K, better than 218K expected, and slightly weaker than last week’s 210K print. Continuing claims also came in better.

US retail sales disappoint

Today’s other important macro data, retail sales, missed across the board, while downward revision to the prior month means the large miss we saw in January was even worse…

• Retail sales +0.6% vs. +0.8% expected; previous month -0.8% from -0.6% reported initially
• Core retail sales +0.3% vs. 0.5% expected
• Retail sales control group 0.0% vs. +0.4% expected

So, for a second month, both headline and core retail sales data have disappointed expectations, and this is something that might prevent the US dollar from recovering more significantly moving forward. With inflation remaining high, and retail sales falling, this suggests consumers are feeling the squeeze. Lately, we have seen a few other macro pointers also pointing to a slowdown in economic activity. If further evidence emerges of a struggling consumer, then we could see the dollar weaken as the odds of a June rate cut increases. However, inflation data will need to weaken and fast.

EUR/USD technical analysis

Source: TradingView.com

At the time of writing, the EUR/USD was testing its session lows around 1.0885. This level marks the top of a key support range between 1.0850ish to 1.0885, as highlighted on my chart. Previously, this are had served as resistance. We have a short-term bullish trend line converging here too.

Therefore, there is the potential for the EUR/USD to rebound from around this area. But given that the drop is driven by macro factors, i.e., rising yields amid strong inflation data, then the bulls must wait for a confirmed reversal candle before looking for bullish setups again.

Indeed, if we get a decisive break below the 1.0850 to 1.0885 area then in that case, the bears might step in more aggressive for then they will have had some confirmation to work with i.e., a broken trend line.

All told, today’s drop in the EUR/USD is not completely a trend-changing move. The bears had what they were after, and now the onus is on the bulls to show up again and defend their ground.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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