The release of robust retail sales and labor market data, coupled with an upbeat Walmart report, allayed concerns about a potential recession in the US, prompting a sell-off in the EURUSD pair. However, the bearish sentiment was subdued. What is the precise reason for this? Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- Strong data has reduced the risks of recession in the US economy.
- The Fed should proceed cautiously to achieve a soft landing.
- The S&P 500 rally has brought EURUSD bulls back to action.
- Short trades can be kept open as long as the euro trades below 1.1015.
Weekly US dollar fundamental forecast
Could the news have been more favorable? US retail sales increased by 1% m/m in July, representing the fastest pace of growth since early 2023. Additionally, unemployment claims continued to decline, and the world’s largest retailer, Walmart, reported higher revenue and raised its profit forecast. The prospect of a recession receded, creating an opportunity for EURUSD bears to mount a counterattack. The issue is that the positive news has been beneficial for the S&P 500 for an extended period. The stock index rally has constrained the US dollar’s gains.
In the early stages of a recession, weak consumer spending generates layoffs that further reduce people’s ability to spend. This spiral continues until it turns into a contraction in GDP. In contrast, Walmart and retail sales data suggest that consumers are ready to lighten their wallets. While a boom is unlikely, it would be premature to talk about a hard landing, either. The outcome will depend on the Fed’s ability to navigate the economic landscape.
US retail sales
Source: Bloomberg.
The US economy is experiencing a deceleration, although the extent of this slowdown is not yet fully defined. In light of this, the most prudent course of action for the Federal Reserve is to gradually ease monetary policy. The markets are well-informed of this, having reduced the projected scope of monetary expansion from 37 bps to 30 bps in September and from 103 bps to 93 bps over the remainder of the year.
Market forecasts on the scale of the Fed’s monetary expansion
Source: Bloomberg.
From the perspective of the US dollar, this trajectory of the federal funds rate is a positive development. A reduction in anticipated market stimulus results in an increase in the USD index, as evidenced by the market performance in early 2024. Conversely, negative news harms the S&P 500, increasing the risk of a recession. The increase in the stock index is driven by positive economic indicators. This enhances global risk appetite and exerts pressure on the greenback as a safe-haven asset.
EURUSD bears were unable to capitalize on the robust retail sales and unemployment claims data due to the shifts in the US equity market.
Notably, a slowing but still strong US economy provides a tailwind for global economic growth and a pro-cyclical currency like the euro, particularly when GDP data from other major economies is more often positive than negative. In this regard, positive developments in the UK and Japan are favorable for the EURUSD pair.
Weekly EURUSD trading plan
The pair is expected to resume an upward trajectory if it returns to the resistance level of 1.1015. However, as long as the EURUSD quotes remain below this level, traders can keep their short trades formed at 1.104 open.
Price chart of EURUSD in real time mode
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