EUR/USD Traders Zero in on U.S. Retail Sales Data

 

The USD rally that started with the release of a strong nonfarm payrolls (NFP) report last Friday continues this week.

The rally will face its first hurdle on Thursday at the U.S. retail sales numbers are published. While employment has been a strong driver of the U.S. economic recovery, the retail sales data has been soft in the past, and it has derailed previous dollar rallies. The most memorable one being the October 15, 2014 release which trigged a dollar and U.S. stocks selloff. The EUR/USD has touched 12-year lows as the European Central Bank’s program has kicked off this week driving the EUR lower as the U.S. economic data has boosted the USD.

Last month, U.S. retail sales disappointed with a –0.8% figure, the second monthly contraction highlighting a weak start to the first quarter of 2015 for U.S. sales. The forecasts were set higher due to the effect on consumer’s wallets from the gas savings due to cheaper oil prices. This is the reason the Federal Reserve has asked the market to look deeper into the employment report details. On the surface, employment seems to be back to pre-crisis levels, yet with lower wages even the beneficial effects of lower energy prices do not create sufficient disposable income to increase spending.


The Low Cost of Oil Hasn’t Upped Spending

The decline of oil prices continues as producers refuse to change their output levels. The promise of gas savings making its way to retailers could be fulfilled this month. The U.S. retail sales figures have in the past thrown doubts around the strength of the recovery of the American economy. The EUR/USD has depreciated 4.75% since the last retail numbers were posted. The pair is trading below 1.06 with all eyes on tomorrow’s release. USD to EUR parity has been in the news as a definite possibility. A strong sales number could boost the USD to break the 1.05 line and head for the next support level at 1.0336.

Conservative American Consumers a Concern

While U.S. employment data has been the biggest driver of the economy, even the Fed has diversified its focus on the lookout for indicators to validate if the American economy continues to grow at a sustainable pace. Retail sales have been a thorn in the side of the U.S. recovery.

Inconsistent data releases have made it hard to understand U.S. consumers. The lower price of oil that hit energy producers has been a welcome turn of events, as there is more disposable income to be spent. Yet consumers are opting not to spend and appear to be saving instead. While this conservative approach is to be applauded, as irresponsible spending was one of the triggers of the crisis in 2008, the fact remains that this recovery has been dependent on the consumer. A more responsible consumer and a strong dollar will not help the U.S. from avoiding a slowdown which is why the Fed is not hanging all the weight of the interest rate decision on employment growth.

U.S. retail sales in January (–0.8%) continued the negative trend started in December of 2014 (–0.9%). The forecast for the retail sales data is to be a positive 0.5% growth in February. The USD has been sensitive to missed expectations of retail sales releases and this one will be no different especially after the strong NFP is making the case for a June rate hike. A below forecast retail sales print could derail the USD optimism in this consumer driven recovery.

Last month, U.S. retail sales disappointed with a –0.8% figure, the second monthly contraction highlighting a weak start to the first quarter of 2015 for U.S. sales. The forecasts were set higher due to the effect on consumer’s wallets from the gas savings due to cheaper oil prices. This is the reason the Federal Reserve has asked the market to look deeper into the employment report details. On the surface, employment seems to be back to pre-crisis levels, yet with lower wages even the beneficial effects of lower energy prices do not create sufficient disposable income to increase spending.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza