Retail Sales drop more than expected, Fed's tightening agenda under risk

Yesterday the focus was mainly on the US Dollar in light of the Retail Sales report from the US as everyone knew that the currency could come under renewed if the consumer report printed in a bearish manner. Indeed the Retail Sales in the US not only retreated for the past month but the revised levels for the previous one came even lower.

It goes without saying of course that traders’ reaction was to dump the Dollar against all its peers as it now seems that a 2015 rate hike becomes more and more distant. The Fed wanted to see good progress across all fronts but the recent string of data from the US economy has been nothing short of disappointing. We could see an improvement in the next couple of months but the US policymakers would probably be more cautious now.

Taking a look at the price action on the major instruments we monitor, the Euro benefited greatly from Dollar’s weakness and climbed above the 1.1400 barrier to trade as high as 1.1480 overnight. News from Eurozone has not been great but the mere fact that the Dollar is being sold off is enough to propel the currency pair higher.

The 1.1500 area is the next level of resistance and we intentionally make word of the bearish news from the Eurozone as we want to warn our readers about the fact that the rally in the Euro starts to become overextended. Sure it can go higher, especially with today’s inflation levels’ report from the US but we would like everyone to keep in the back of their minds that henceforth the uptrend becomes hard to be sustained. Caution is advised and focus on the short term rather than anything else.

The Cable was also on the rise yesterday, firstly on the back of the exciting employment data report that was released early in the day and secondly due to the miss in the Retail Sales from the US. The UK currency not only clawed back Tuesday’s losses but it also rallied almost to the 1.5500 area which appears as the resistance level for the short term.

Does this development alter our outlook for the Pound? Hardly, of course we’re pleased to see good progress on the labor market domestically but it would be hard for the BoE to do anything on the interest rates’ front before the Fed and as we mentioned above this might come next year. Similar to the Euro, we would advise our readers to be on the lookout for exhaustion signs on the current uptrend that could hint towards a reversal or a correction lower at least.