Euro drops on weak inflation, retail sales

The euro pushed higher every day this week but has hit a roadblock on Thursday and has posted considerable losses. Currently, EUR/USD is trading at 1.2270, down 0.46% on the day.

Eurozone retail sales sink

Retail sales are the primary gauge of consumer spending, and the news was grim in November, with retail sales plunging by 6.1 per cent. This figure was much weaker than the forecast of -3.4%. The sharp contraction, the deepest since April, can be attributed to lockdown measures that were imposed in several countries in the eurozone, which hampered retail trade. There wasn’t any relief on the inflation front, as headline CPI for December came in at -0.3%, marking a fifth consecutive decline. Falling inflation levels are a clear sign of weak economic activity. With Covid-19 still uncontrolled across the bloc, we can expect economic conditions to remain weak early in the new year.

Germany is the locomotive of the eurozone, and it’s being counted on to lead the way to recovery for the bloc. This week’s data has been encouraging. Retail sales beat expectations with a strong gain of 1.9%, while CPI climbed to 0.5%, its highest level in six months. The manufacturing industry continues to expand, with strong numbers this week from Manufacturing PMI and Factory Orders. The only fly in the ointment was the Services PMI, which has pointed to contraction for several months, as services as been hit hard by the Covid-19 pandemic.

Despite weak economic conditions in the eurozone, the euro has taken advantage of a US dollar in the doldrums, as EUR/USD continues to trade at levels not seen since April 2018. With expectations that the Democrats will churn out more stimulus and flood the economy with dollars, the euro could continue to appreciate, even without a noticeable improvement in the eurozone economy.

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EUR/USD Technical

• There is resistance at 1.2362, followed by a resistance line is at 1.2397
• EUR/USD has broken through support at 1.2279 in the Asian session. The next support lines are at 1.2231 and 1.2196
• The pair crossed above the 10-day MA line earlier in the week but is currently putting downward pressure on the line

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