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Euro dips to fresh one-month lows after strong US Retail Sales

  • The Euro has dropped to fresh multi-week lows at the 1.0850 area following US Retail Sales data.
  • Dwindling hopes of Fed rate cuts and geopolitical tensions are underpinning support for the US Dollar.
  • Later today, a slew of Fed speakers will offer fresh cues into the central bank's monetary policy plans.

The Euro (EUR) has drifted to fresh lows Wednesday, as stronger-than-expected US Retail Sales have confirmed the resilience of the US economy casting further doubt on the chances of a March rate cut. This, combined with the increasing geopolitical tensions in the Middle East and the hawkish comments by Fed policymakers are underpinning support for the USD and acting as a headwind for the Euro.

On Tuesday, the Federal Reserve (Fed) Governor, Christopher Waller, warned that the bank is unlikely to trim rates while consumer inflation remains at a “striking distance” of the 2% target of price stability. Waller echoed last week’s comments by other Fed policymakers, demonstrating that the market got ahead of itself with the global central banks’ easing expectations.

Later today, Fed officials Michelle Bowman, Michael Barr, and John Williams will meet the press and might provide some more cues on the Bank's monetary policy outlook. European Central Bank (ECB) president Christine Lagarde is scheduled to speak on Wednesday.

Daily digest market movers: Euro succumbs on US Dollar strength as traders pare back Fed cuts' hopes 

  • The Euro is hovering near one-month lows against a stronger USD with all eyes on US consumption figures. 
     
  • US Retail Sales increased at a 0.5% pace in December, up from the 0.3% rise witnessed in November and above market expectations of a 0.4% reading. 
     
  • Fed Governor, Christopher Waller struck a hawkish tone on Tuesday and cast further doubt about the possibility of a Fed rate cut in March.
     
  • Futures markets are pricing less than 60% chances of Fed cuts in March, down from 75% at the start of the week.
     
  • In the Euro Area, final CPI figures for December confirmed that the headline inflation accelerated to a 2.9% yearly rate, from 2.4%, while the Core CPI eased to 3.4% from 3.6% in November.
     
  • Later today, Fed board members Michael Barr and Michelle Bowman are likely to give further insight into the bank’s monetary policy outlook.
     
  • Somewhat later, European Central Bank President, Christine Lagarde, and Bundesbank Governor Joachim Nagel will speak. Their comments about the bank’s policy plans will be observed with interest.
     
  • The uncertainty in the Red Sea persists, forcing shipping firms to find alternative routes for their cargo. This increases shipping costs and will translate into higher inflationary pressures.
     
  • Data from China seen earlier today has added to evidence of the frail growth in the world’s second-largest economy. The third quarter GDP grew at  5.2% year on year, below the 5.3% expected, with retail sales also disappointing.

Technical Analysis: EUR/USD is under increasing bearish pressure below 1.0880 support


The EUR/USD has confirmed its near-term bearish trend with price action piercing the bottom of the last two week’s trading range, and the 38.2% retracement of the October - December rally, at 1.0880. 

In so doing, the pair resumes its downtrend from late December highs, activating a bearish Head and Shoulders pattern. The next support levels are 1.0780 and 1.0725. The H&S measured target is 78.6% Fibonacci retracement of the aforementioned rally, at 1.0600.

On the upside, the pair should regain 1.0880 and the reverse trendline support, now at 1.0925 in order to shift its focus back to the 1.1000 area.
 

EUR/USD 4 Hour Chart

Euro price this week

The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the weakest against the US Dollar.

 USDEURGBPCADAUDJPYNZDCHF
USD 0.66%0.44%0.84%2.02%1.76%1.85%1.22%
EUR-0.67% -0.21%0.18%1.37%1.10%1.20%0.56%
GBP-0.45%0.22% 0.40%1.59%1.32%1.42%0.78%
CAD-0.84%-0.19%-0.38% 1.19%0.93%1.02%0.40%
AUD-2.07%-1.38%-1.59%-1.20% -0.27%-0.17%-0.82%
JPY-1.79%-1.13%-1.46%-0.94%0.27% 0.10%-0.55%
NZD-1.88%-1.22%-1.43%-1.02%0.17%-0.10% -0.64%
CHF-1.26%-0.57%-0.78%-0.39%0.82%0.54%0.63% 

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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