Euro, US Dollar, Eurozone GDP, US Retail Sales, Coronavirus – TALKING POINTS
- US Dollar could rise if retail sales data sparks risk aversion amid Covid-19 pandemic
- Euro may face increased selling pressure ahead of the release of Eurozone GDP data
- EUR/USD could break key support level, leaving the pair vulnerable to multi-year low
At the start of Asia’s Friday trading session, FX markets were showing a modest risk-on tilt as the cycle-sensitive Australian and New Zealand Dollars edged higher vs the anti-risk Japanese Yen. However, sentiment soon soured and caused this dynamic to reverse with US equity futures turning red while APAC stocks were mixed. Risk aversion was further amplified after Chinese industrial data showed mostly contractionary figures.
Euro Outlook Bearish Ahead of Eurozone GDP Data
Eurozone GDP on a year-on-year and month-on-month basis is expected to shrink to 2008 crisis-era lows with forecasts of a 3.3 percent and 3.8 percent contraction, respectively. This also comes at a time when the region continues to face internal political division and growing financial stability. In addition to the coronavirus, shaky geopolitical fundamental circumstances will likely factor into weaker GDP data in the months ahead.
Policymakers continue to bicker on how to pay for stimulus measures aimed at mitigating the impact of the worst economic crisis the monetary union has ever faced. The battle between the traditionally fiscally-conservative North and counterparts to the South threaten to further aggravate selling pressure in the politically-sensitive Euro.
US Dollar May Rise if Retail Sales Data Sparks Risk Aversion
The US Dollar may rise if preliminary month-on-month retail sales data for April sparks risk aversion and boosts demand for highly-liquid, haven-linked assets like the US Dollar. Analysts have put the median forecast at -12.7 percent. If this figure is realized, it would mark the weakest reading on record, crushing the 2009 crisis-era low at -2.0 percent.
Consumption has plummeted while the unemployment rate now hovers over 14 percent, with forecasts from officials like St. Louis Fed President James Bullard anticipating it could rise as much as 20 percent. As the largest consumer-driven economy, weakening demand from the global powerhouse will have significant, cross-continental implications. This may put growth-oriented assets at risk while providing a boost to havens.
This dynamic may be amplified after preliminary University of Michigan consumer confidence data for May is released. Analysts are estimating a 68.0 reading, notably lower than the prior 71.8 print. With Depression era-high unemployment rates and weaker consumption, it is likely this statistics will show an underwhelming figure and further support demand for the haven-linked US Dollar.
EUR/USD Outlook Ahead of Key Data Releases
EUR/USD may break below key support at 1.0783 if the aforementioned data releases catalyze an aggressive selloff in the pair. If that inflection point is breached with follow-through, the pair may retest the multi-year low at 1.0654. EUR/USD’s relatively directionless trading may have been the result of investors waiting to get a better idea of the coronavirus’ impact on the economy.
EUR/USD – Daily Chart
EUR/USD chart created using TradingView
Consequently, this data could arouse significant volatility in the pair and cast a bearish shadow over the Euro if the statistics reinforce the notion of a slow and painful recovery ahead. From a technical perspective, breaking below 1.0783 and exposing 1.0654 will be the first step in cementing a strongly bearish outlook for the pair.
— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter