Jignesh Davda
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EUR/USD Extends Gains on Weak US Retail Sales Report

The dollar fell broadly on Wednesday after news that US retail sales unexpectedly declined 0.3% in September.

There has been a string of weak data out of the United States and the retail sales report reaffirmed that the economy is slowing. The US dollar extended losses after the data release and the dollar index (DXY) is down about 1.7% from the peak posted in September.

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Also underpinning EUR/USD is optimism that a Brexit deal could materialize this week. Positive Brexit news helped the exchange rate recovery on Tuesday after briefly dipping below the 1.1000 handle. However, the correlation with Sterling has lessened significantly since initial boost on Tuesday.

There is still quite a bit of progress needed in reaching a Brexit deal. EU officials need to approve the deal during the EU summit which takes place today and tomorrow. But more importantly, the UK parliament needs to ratify the deal. It appears the DUP is not on board with the current deal which stands to sour investor sentiment.

For this reason, we may see EUR/USD pare some of its recent gains as investors may want to ensure a Brexit deal is in fact happening to further bid up the single currency.


Technical Analysis

Another reason why the exchange rate might correct lower from here is because there is some fairly significant resistance in play. The pair is facing a hurdle from a horizontal level that held it higher at the start of August and lower around the middle of September. While we may see an intraday move above the level, how it closes by the end of the day in relation to it will be important.

EURUSD Daily Chart

In addition to the horizontal level, the pair is quite oversold on the smaller time frames. It’s also nearing resistance from the upper bound of a rising trend channel that has encompassed price action since the start of October.

EURUSD 4-Hour Chart

While the pair could correct lower from here, there isn’t any evidence of a turn as of yet. Further, there’s not much reason to believe, at this stage, that the pair will make a meaningful reversal. In this context, EUR/USD continues to remain a buy on dips.

Bottom Line

  • EUR/USD is trading sideways after a sharp push higher on the back of yesterday’s US retail sales miss.
  • Resistance is in play from a horizontal level at 1.1072.
  • Further resistance is found slightly above the level. It comes from a rising trend channel that has contained the pair since the start of the month.
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