Friday’s Retail Sales Data Softens Dovish Market Expectations for a Rate Cut
US retail sales data triggered broad-based dollar strength late last week to drive EUR/USD sharply lower. After reaching a high of 1.1343 earlier in the week, it barely managed to hold above 1.1200 after the report.
Expectations for a dovish Fed meeting fell following the retail sales report. The markets are no longer so sure that the Fed will cut rates in June as the CME FedWatch Tool shows probabilities of a June cut down to about 20% in early European trading on Monday.
The futures markets are not necessarily turning hawkish following retail sales. The data merely suggests that the expectations for a rate cut have shifted a little later in the year than earlier anticipated. Probabilities for at least two rate cuts by the last meeting of the year are still nearly fully priced in.
The economic calendar over the next few days is light. ECB’s Draghi will speak today and tomorrow. His speech last week did not do much to alter market expectations, so I don’t expect a reaction to the two this week.
There is inflation data out of the Euro area scheduled for release tomorrow which can trigger a bit of short-term volatility.
On a 4-hour chart, there is a horizontal support level at 1.1204 which is in play. The area is quite significant considering the psychological properties of the 1.12 handle and the 4-hour 200-period moving average which is nearby.
This area also capped a notable rally in late May and supported a sharp spike lower in early June. I think we might see EUR/USD bounce a little bit here as the momentum from Friday’s decline fades a bit in the new week.
An hourly chart shows just how strong the downside momentum has been. Last week, there was a bear flag pattern in play that I had discussed in one of the prior daily forecasts. This pattern carried a target of 1.1260.
At the time the pair reached targets, there was also support from the lower bound of a declining trend channel. This can be seen in the above chart. On top of that, 1.1260 is a horizontal level.
Although retail sales provided a catalyst for dollar strength, the fact that it broke through such a significant zone goes to show how much sellers are in control at the moment. In this context, I expect any early week recovery rallies to be shallow.
I see upside resistance at 1.1237 for the session ahead. The level carries confluence with the 100-period moving average on a 4-hour chart. If the pair manages to scale it, further resistance is found at 1.1260.
- EUR/USD is trying to carve a bottom, but looking for a bounce here can be risky considering the recent price action.
- A light economic calendar in the next few days favors range bound conditions.
- We are more likely to see a meaningful move after the Fed meeting.
This article was originally posted on FX Empire
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