EUR/USD falls sharply to near 1.0800 on weak German Retail Sales data, Fed policy eyed

The EUR/USD pair tumbles to near the round-level support of 1.0800 amid weaker German Retail Sales data and the dismal market sentiment. Monthly Retail Sales for December were surprisingly contracted by 1.6% while investors anticipated them expanding by 0.7%. In November, consumer spending was sharply lower by 2.5%.

Annual Retail Sales were down at a slower pace of 1.7% against 2.4% decline in November. This clearly shows that households are facing burden of higher interest rates by the European Central Bank (ECB) and persistent price pressures. A sharp decline in the cost-of-living would prompt expectations of early rate-cuts by the ECB, which has built pressure on the Euro.

ECB president Christine Lagarde is of the view that the central bank will start reducing interest rates from late Summer. Expectations for a delay in rate-cuts improved after a slight increment in the preliminary Q4 Gross Domestic Product (GDP) have waned after the downbeat Retail Sales data.

The Eurozone economy managed to avoid a technical recession as it remained stagnant in the last quarte of 2023 after contracting by 0.1% in the July-September quarter.

The market mood remains cautious as investors await the interest rate decision by the Federal Reserve (Fed). S&P500 futures have generated significant losses in the early European session. The US Dollar Index (DXY) has bounced back slightly above 103.50.

Considering CME Fedwatch tool, investors rates will remain unchanged in the range of 5.25-5.50%. The outlook on interest rates by the Fed will be of utmost importance.