EUR/USD sells off on Thursday, breaking below key support at 1.0800 after the release of subpar German Retail Sales data raised further concerns over the health of Europe’s largest economy, weighing on the Euro (EUR). The pair is also pressured lower by a backdrop of the Federal Reserve (Fed) increasingly looking like it will delay cutting interest rates in light of more robust economic data and stickier inflation.
EUR/USD downtrend continues on fears Fed could delay cuts EUR/USD’s move down extends the short-term downtrend that started after the rollover from the March 8 highs in the 1.0980s. The main catalyst appears to be the diverging commentary from rate-setters at the US Federal Reserve (Fed) and European Central Bank (ECB).
Whilst at the beginning of March the ECB was signaling it would cut interest rates by June and the Fed potentially by as early as May, recent higher-than-expected US data and sticky inflation has led many Fed officials to question whether it may be too early to start cutting interest rates.
The view the Fed may keep interest rates higher for longer has supported the US Dollar (USD) because higher interest rates tend to attract more foreign capital inflows. This is bearish for EUR/USD, which measures the buying power of a single Euro in USD terms.
On Wednesday, Federal Reserve board member Christopher Waller added his voice to those advocating a delay, saying that “there is no rush to cut the policy rate,” in a speech to the Economic Club of New York, according to Reuters.
ECB officials, on the other hand, have cleaved increasingly to June. Eurozone economic data has been on the whole disappointing compared to US data, although persistently high wage inflation still concerns some policymakers.
EUR/USD took another step lower on Thursday after German Retail Sales in February showed shoppers on the whole tightening their purse strings. Weakening consumer spending is another sign inflation will come down further, prompting the ECB to cut interest rates.
Retail Sales fell 2.7% YoY in Germany, which was far below estimates of a 0.8% decline, according to data from Statistisches Bundesamt Deutschland. Month-on-month the 1.9% decrease must have come as a shock after economists predicted a 0.3% rise.
Friday’s US core Personal Consumption Expenditures (PCE) Price Index data for February – the Fed’s preferred gauge of inflation – is likely to be an even more important release for EUR/USD.
A higher-than-expected result could push even further back the time when the Fed is expected to cut interest rates, with negative consequences for the pair.
Technical Analysis: EUR/USD continues pushing lower EUR/USD extends the dominant short-term downtrend that started at the March 8 high. It has now broken below key support at around 1.0800.
The pair formed a three wave price pattern called a Measured Move back in February and early March and the low of wave B provided the underpinning for key support at just above 1.0800.
If the break in progress proves decisive it would signal a continuation of the downtrend even lower, to the next target at 1.0750, followed by the February lows at roughly 1.0700.
A decisive break is one characterized by a long red bearish candle that breaks cleanly through the level and closes near its low, or three down candles in a row that breach the level.
Alternatively, a move above the 1.0950 level would bring into question the validity of the short-term downtrend.
