Euro remains steady above 1.1600, unfazed by downbeat Eurozone Retail Sales

The Euro (EUR) remains hovering between 1.1600 and 1.1630 against the US Dollar (USD) on Friday, hardly affected by the release of a disappointing Eurozone Retail Sales report earlier in the day. Investors are wary of placing large US Dollar directional bets ahead of the US Nonfarm Payrolls (NFP) release, which is expected to provide further insight into the outcome of September’s Federal Reserve (Fed) monetary policy meeting.

Eurozone Retail sales contracted 0.6% in July, against market expectations of a 0.3% increase, while June's reading was revised up to a 0.2% increase, from previous estimates of a 0.3% decline. Year-over-year, retail consumption grew 0.6% in July, just above half of the 1.1% expected by the market.

Earlier on Friday, data from Germany showed that Factory Orders rose 2.5% in July, beating expectations of a 0.3% increase, and following a 3.7% gain in June. The main driver for this unexpected improvement was a 126.4% rise in large-scale transport orders such as aircraft, ships, or military vehicles, which have concealed a 12.5% decline in orders for the German key automotive industry.

NFP Dollar reaction seen as limited without follow-through from inflation

The highlight of the day, however, is the US NFP report, due during the US session. The US economy is expected to have created 56K new jobs in August following an unexpected 23K drop in July. This time, however, the impact of the release in the US Dollar is likely to be softer than usual, as investors await next week's Consumer Price Index (CPI) figures to assess the chances of a rate hike at the Fed meeting on September 15 and 16.

Analysts at TD Securities argue that “the more important piece of the puzzle is inflation, as part of the strength in the NFP can be considered to be a reversal of the July weakness.” In that sense,, “a strong payrolls report (...) will give a slight boost to the USD but is unlikely to push the committee towards a hike unless followed by a strong inflation print.”

“In the case of a +40-50k upward payrolls surprise to consensus median as we expect, historical sensitivity and current positioning would suggest +0.2% knee-jerk USD reaction on the day,” said the experts in a note.

On Thursday, Fed Governor Christopher Waller urged the Fed to give disinflation a chance and added that the central bank could afford to stand pat on rates in September, as in his opinion, "the current rate setting could get us back to 2% inflation". These comments reduced tightening expectations to a coin toss in September.