Forex Fundamental Analysis Reports

EUR/USD May Dip Below 1.3600 Amidst Soft European Data, Thin Trading

Euro-zone Retail Sales (MoM) (MAY) (9:30 GMT; 5:30 EST)
Expected: 0.0%
Previous: 0.2%

Euro-zone Retail Sales (YoY) (MAY) (9:30 GMT; 5:30 EST)
Expected: 1.7%
Previous: 1.6%

How Will The Markets React?

While European markets are typically keen to tune into the release of Euro-zone retail sales, this Wednesday presents unique conditions for forex traders. With the US on holiday, liquidity could be inordinately thin, which tends to lead to absolutely dead price action or unexpectedly large spikes in volatility as institutions try their hand at running stops. Nevertheless, it is worth noting the risks associated with the retail report. Retail sales in the Euro-zone are anticipated to go unchanged during the month of May, though the annual rate of growth is estimated to hit 1.7 percent. However, the figure out of Germany - the Euro-zone's largest economy - unexpectedly plunged 1.8 percent during the same period. This result was far worse than the expected 0.3 percent decline and signals that consumption throughout the region may have taken a greater than predicted hit. Nevertheless, with the European Central Bank scheduled to announce their rate decision on Thursday, traders may be hesitant to enter positions, especially in European fixed income and equity markets, which may only lead to tight range conditions

FX - EUR/USD

Since rebounding from the 1.3300 level, EUR/USD has been targeting the record highs achieved a little more than two months ago as the US dollar has softened and the ECB has continued to issue hawkish rhetoric. Will the pair be able to take on new record highs above 1.3680? There are a few factors to consider: first, volumes will be relatively thin on the July 4th US holiday, making price action susceptible to holding tight ranges. Second, the US dollar faces huge event risk on Friday when US Non-Farm Payrolls will be released. While the ECB meeting on Thursday does present event risk as well, the central bank is not anticipated to raise rates within the next few months, let alone this week.

However, we have seen large institutional traders in the past take advantage of such thin conditions. How will they play it this time around? It is possible that EUR/USD could be bought up to test the 1.3680 level, with price pushed high enough to trigger stops near 1.3700. The case for this may be furthered if Euro-zone retail sales hit the tape better-than-expected. On the other hand, estimates for the release are set at an unchanged pace for the month of May, but dismal retail sales for the same period from Germany signal that the Euro-zone figure could actually be quite worse. As a result, EUR/USD could be pulled back below 1.3600, but the moves may only be temporary given the aforementioned risks looming on the horizon.