Strong U.S. Retail Sales Report to Tame EUR/USD Rebound

– U.S. Retail Sales to Increase 0.3% After Unexpectedly Contracting 0.3% in January 2018. Rebound in Private Consumption to Keep Fed on Track for Three Rate-Hikes in 2018.

– EUR/USD Carves Higher & Lows Following Recent Batch of Lackluster U.S. Data Prints. Monthly Range at Risk as Relative Strength Index (RSI) Threatens Bearish Formation.

Trading the News: U.S. Retail Sales

A 0.3% rise in U.S. Retail Sales may spark a limited reaction as it does little to alter the monetary policy outlook, but a marked rebound in household consumption may curb the recent advance in EUR/USD as it boosts the outlook for growth and inflation.

Signs of growing demand should keep the Federal Open Market Committee (FOMC) on course to further normalize monetary policy in 2018 as ‘members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate,’ and a positive development may generate a bullish reaction in the greenback as it encourages to adopt a more hawkish tone at the next interest rate decision on March 21.

However, another below-forecast print may fuel the recent advance in EUR/USD as it curbs bets for four rate-hikes in 2018, and Chairman Jerome Powell and Co. may continue to project a neutral Fed Funds rate of 2.75% to 3.00% as the central bank struggles to achieve the 2% target for inflation.

IMPACT THAT THE U.S. RETAIL SALES REPORT HAS HAD ON EUR/USD DURING THE PREVIOUS RELEASE

January 2018 U.S. Retail Sales

EUR/USD 5-Minute Chart

Household spending unexpectedly slipped 0.3% in January after holding flat during the last month of 2017, while a separate report showed the U.S. Consumer Price Index (CPI) holding steady at an annualized 2.1% during the same period amid forecasts for a 1.9% print. A deeper look at the report showed the weakness was led by a 1.3% decline in demand for motor vehicles/parts, with sales of building materials narrowing 2.4%, while clothing sales increased 1.2% during the same period.

EUR/USD edged lower amid signs of sticky inflation, but the market reaction was short-lived, with the pair pushing back above the 1.2400 handle to close the day at 1.2449. Want more insight? Join DailyFX Currency Analyst David Song LIVE for an opportunity to cover key market themes along with potential trade setups.

EUR/USD Daily Chart

• EUR/USD may continue to consolidate as it preserves the range from earlier this month, but the rebound from the March-low (1.2155) may gather pace over the coming days as the pair carves a fresh series of higher highs & lows.
• Will keep a close eye on the Relative Strength Index (RSI) as it comes up against trendline resistance, with another failed attempt to break out of the bearish formation raising the risk for range-bound prices.
• Need a break/close above the 1.2430 (50% expansion) region to bring the topside targets back on the radar for EUR/USD, with the next hurdle coming in around 1.2640 (61.8% expansion) to 1.2650 (38.2% retracement).

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— Written by David Song, Currency Analyst

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

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