EUR/USD Rate Eyes August High Ahead of US Retail Sales Report.
Despite the strong rally in the Dollar Index (DXY) over the past several days, the EUR/USD rate is on the verge of breaking through an August high. The pair is currently trading at 0.9828 in the North American session, and should be looking to test the August high of $1.0069. However, the USD will need to be able to pull back to avoid testing its key support levels. Ideally, the pair should avoid testing the former support zone around May lows at $1.0349.
The Dollar has been on a strong run in recent weeks as the energy crisis in Europe and the weakening of the Yen continue to push the currency higher. However, there are still macro worries surrounding the Eurozone that could limit the pair’s upside. While the pair was hit hard last week, the market is now easing its concerns and may even be looking to continue its momentum.
In the US, retail sales are expected to rise by 0.5% month-over-month in August. Analysts expect the Core Retail Sales reading to be below estimates. However, the headline CPI may be slightly higher. The Federal Open Market Committee (FOMC) will release the minutes from its last meeting tomorrow. Whether or not the committee decides to stick with its current path for implementing higher interest rates will be very important.
The Fed is expected to raise its key interest rate again next Wednesday. If the market has any doubts about the path that the Fed is taking, they can turn to the US Treasury yields. These yields are at two-month highs of 3.26.
Traders will be watching for any hints that the Fed is going to shift its hike cycle to a more restrictive path in December. While the current consensus is for a 75-basis-point hike, a smaller increase could keep the dollar bulls alive. However, the US economy is expected to grow at just a mediocre rate, which could mean a prolonged period of below-trend growth. Moreover, high inflation could undermine the outlook.
Inflation data for the Eurozone has shown a strong acceleration, from 9.1% in August to 9.9% in September. This marks a significant departure from the initial forecast of 10.0%. The ECB remains committed to its mandate of inflation being well controlled. But members have also been advocating for less aggressive policy tightening. As such, the ECB’s terminal rate is currently at 3%. This rate is believed to be lower than the ECB’s target rate of 1.25%.
The ECB’s members will speak later today. If they agree with the ECB’s policy direction, the pair could break out from its current high of $1.00345 to a second major resistance level at $1.0253. However, if they don’t, EUR/USD may fall back to its previous support level at $0.9934.
Today also sees the release of US Non-Farm Payrolls and Housing Price Index data. These releases are due before the retail sales figures for the Eurozone. Assuming the Eurozone’s retail sales figures are as strong as expected, the Euro will continue to appreciate against its US counterpart. However, a weaker retail sales report could drag the USD.
