EUR/USD Daily Forecast – Volatility Remains Subdued as Traders Await Wednesday’s US Retail Sales

After three weeks of wild price swings, the markets appear to be reverting back to previous price patterns.

A good example is gold prices which traditionally stand to gain during times of uncertainty yet struggled to do so last month as the US dollar dominated the markets.

This is no longer the case and the shiny metal reached fresh seven-year highs earlier today, aided by a weaker dollar. The trend here is in line with what we’ve seen over the last nine months or so.

But while dollar strength is no longer the prevalent driver in the markets, EUR/USD has struggled to gain. The single currency has only retraced about half of the decline that began in late March and about a third of the decline measured from the high posted in early March.

This is not all that unusual as we’ve seen EUR/USD quick to fall into a range over the past few years.

A similar conclusion can be made when comparing the correlation between EUR/USD and the S&P 500. This correlation was strong in March but since the start of the month, a divergence is seen between the two assets.

In other words, while the US equity index is recovering on the back of a rise in optimism among investors, EUR/USD has struggled to gain.

The price action signals that the same investors that anxiously bought dollars on the way down in equities are not interested in selling the greenback while equities recover, at least not in the same manner.

Incoming Data to Drive EUR/USD

This tends to introduce some downside risk for EUR/USD in the event sentiment deteriorates, although my base case is for a range to develop and for the dollar to continue to decouple its correlation with equities.

Further, I expect EUR/USD traders to fall back to traditional metrics in assessing the value of the exchange rate such as economic data and rate differentials. How the two economies manage the impacts of the Coronavirus also stands to have a meaningful impact.

In this context, Wednesday’s release of US retail sales figures will be important. Analysts are expecting the report to show a large 8% drop in sales for March. Thursday’s jobless claims report will also be carefully watched in order to asses if there is an improvement in the labor market.

Unless incoming data deviates from analyst expectations in a significant manner, I expect EUR/USD to hold within a narrow range compared to recent price action. The 1.1000 level offers strong resistance to the upside while buyers may look to step in on dips towards 1.0800-1.0830 in the week ahead.