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14 August 2020

Three reasons for the greenback comeback, all eyes on retail sales

The US dollar has been gaining ground once again as the bond-yield pendulum swings up again. Washington’s fiscal impasse, a weak bond auction, upbeat jobless claims, and Sino-American relations will make way for retail sales figures for July.

Unsuccessful auction: After the 10-year bond auction succeeded and pushed bond yields back down, America’s 30-year debt issuance on Thursday resulted in higher returns and pushed the whole curve higher. The US dollar was carried higher with it.

Fiscal impasse: The second upbeat dollar driver is the ongoing fiscal impasse in Washington. Republicans and Democrats blame each other for the statelame. Apart from disagreeing on federal unemployment claims and aid to states, the parties are at odds over funding to the US Post Office – essential for guaranteeing a quick count of mail-in votes.

Encouraging jobless claims: Data is the third factor boosting the greenback. US initial jobless claims dropped below one million in the week ending August 7 – the first such fall since the pandemic. Investors will be watching if the encouraging recovery in the labor market continues.

The focus now shifts to US retail sales figures for July, which are projected to advance at a moderate rate. America’s economy is centered on consumption, making the top-tier figure critical for markets.

Later in the day, the University of Michigan’s preliminary Consumer Sentiment Index for August is set to remain around July’s 72.5 figure, low ground.

Gold has been edging higher, changing hands at around $1,950, extending its recovery.

EUR/USD is trading above 1.18 yet off the highs. Coronavirus cases are picking up in Europe, with the UK requiring a quarantine for those returning from France and other countries. An update on second-quarter Gross Domestic Product is set to confirm that the eurozone economy shrank by 12.1%.

GBP/USD is trading below 1.31 after authorities announced some restrictions will be eased in England. Brexit negotiations are set to resume on August 18.

WTI oil is trading around $42, stable. Israel and the United Arab Emirates announced they would establish full diplomatic relations.

GBP/USD: Further downside not ruled out

EUR/USD Analysis: Range-play intact amid uncertainty over US fiscal stimulus

Short-term technical outlook

From a technical perspective, the pair has been oscillating in a broader 200 pips trading range over the past three weeks or so. The price action constitutes the formation of a rectangle on short-term charts, warranting some caution for aggressive traders. Hence, it will be prudent to wait for a sustained move beyond the 1.1900 mark or a convincing break below the 1.1700 level before positioning for the pair’s next leg of a directional move.

Above the 1.1900 mark, the pair is likely to aim towards reclaiming the key 1.2000 psychological mark with some intermediate resistance near the 1.1975-80 region. Conversely, a break below the 1.1700 mark will be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent corrective slide from near two-year tops set earlier this month. The pair might then accelerate the fall towards the 1.1625-20 support area.

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