EUR/USD Eyes Sub-$1.085 on Economic Sentiment and US Retail Sales

Highlights

• On Monday, the EUR/USD fell on China concerns and German wholesale prices.
• German ZEW Sentiment and US retail sales are key for price action today.
• RSI signals bearish sentiment, with sub-$1.0850 in view.

On Monday, the EUR/USD fell by 0.36% to $1.09056. China’s economic woes weighed on investor sentiment, with German wholesale prices for July adding to the bearish mood.

Today, ZEW Economic Sentiment figures for Germany and the Eurozone will draw interest. The macroeconomic environment has deteriorated, suggesting a sharp decline in sentiment. Economists forecast the German ZEW Economic Sentiment Indicator to fall from -14.7 to -16.0.

The ZEW Economic Sentiment Index reflects the level of optimism or pessimism that analysts have regarding the economic outlook over six months. Negative figures reflect a pessimistic view of the economic outlook and an increasing chance of a recession.

The EUR/USD has become increasingly sensitive to the ZEW Economic Sentiment Index. Sensitivity will likely persist over the near term as macroeconomic conditions continue deteriorating.

With the European economic calendar on the busier side, investors should track ECB chatter. However, no ECB Executive Board Members are on the calendar to speak today, leaving commentary with the media to move the dial. Dovish speeches would further pressure the EUR/USD.

Economic indicators from China failed to spook investors this morning. News of the PBoC cutting key policy rates offset the negative numbers.

The US Session

US retail sales and the NY Empire State Manufacturing Index will move the dial. We expect the retail sales figures to have more impact.

Economists forecast retail sales to increase by 0.4% in July versus +0.2% in June.

A jump in retail sales could force the Fed to hike rates to curb spending and eliminate the demand effect on consumer price inflation.

Hotter-than-expected US retail sales would also signal further divergence between the euro area and the US economies and tip the monetary policy divergence scales in favor of the dollar.

However, with the manufacturing sector accounting for less than 30% of the US economy, the NY State numbers are unlikely to influence the Fed.

EUR/USD Price Action

Daily Chart

The Daily Chart showed the EUR/USD hold above the 1.0900 – $1.0850 support band. After the bearish Monday session, the EUR/USD remained below the 50-day EMA while holding above the 200-day EMA, sending bearish near-tern but bullish longer-term price signals.

A EUR/USD move through the 50-day EMA would give the bulls a run at the $1.1015 – $1.1060 resistance band. However, failure to move through the 50-day EMA would leave the $1.0900 – 1.0850 support band and sub-$1.0850 in play.

Looking at the 14-Daily RSI, the 40.62 reading reflects bearish sentiment. The RSI aligns with the 50-day EMA, signaling a fall through the $1.0900 – 1.0850 support band.

4-Hourly Chart

Looking at the 4-Hourly Chart, the EUR/USD sits above the $1.0900 – $1.0850 support band. The EUR/USD remains below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals.

The 14-4H RSI at 37.86 reflects bearish sentiment, with selling pressure outweighing buying pressure. Significantly, the RSI suggests further losses and a fall through the $1.0900 – $1.0850 support band.

Price action today hinges on the German ZEW Economic Sentiment Index and US retail sales figures.