U.S. Dollar Pulls Back As Retail Sales Exceed Expectations

Key Insights

• U.S. Retail Sales increased by 1% month-over-month in June. 
• EUR/USD managed to get back above the 1.0000 level. 
• U.S. Dollar Index will need additional catalysts to move towards the 110 level. 

Markets Bet On A 75 Bps Hike From The Fed

U.S. dollar is losing some ground after the release of the U.S. Retail Sales report. The report indicated that Retail Sales increased by 1% month-over-month in June, compared to analyst consensus of 0.8%. On a year-over-year basis, Retail Sales grew by 8.4%.

The recent Inflation Rate and Producer Prices reports highlighted the challenging situation on the pricing front. However, the Retail Sales report indicated that the economy remained in a decent shape as consumers were ready to spend money.

Some traders are willing to bet that we have already seen peak inflation in the U.S. Commodity markets have been under pressure in recent weeks, which should have a positive impact on inflation in July.

Markets are once again pricing in a 75 bps hike at the next Fed meeting. The probability of a 100 bps hike declined to 35.6%, which is bearish for the U.S. dollar.

Euro Rebounds Against U.S. Dollar

EUR/USD has recently received strong support near the 0.9950 level and moved back above 1.0000. The dynamics of EUR/USD will have a major impact on the general mood in the forex market.

The key question is whether EUR/USD will be able to firmly settle below the 1.0000 level, which will lead to another wave of selling. While the situation in the European economy is challenging, it remains to be seen whether EUR/USD will be able to gain downside momentum in the near term.

The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, remains overbought ahead of the weekend. At this point, it looks that it will need additional catalysts to settle above 108.50 and move towards the 110 level. A panic sell-off in EUR/USD can serve as such a catalyst, but traders will likely have to wait until the next week to see whether there is enough selling pressure in EUR/USD.

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