US Consumer still spending despite high inflation; EUR/USD

Anyone who is worried about the effects that inflation will have on household spending can take a deep breath for another month as April’s Retail Sales data continued to be strong.

Amazon

Anyone who is worried about the effects that inflation will have on household spending can take a deep breath for another month as April’s Retail Sales data continued to be strong.  The headline Retail Sales print for April was 0.9% MoM vs 0.9% MoM expected and 1.4% MoM (revised higher from 0.5%!) in March.  This was the fourth straight month of increases.  The ex-Autos print beat estimates, coming in at 0.6% MoM vs 0.4% MoM expected and 2.1% (revised higher from 1.1%) in March.  The strongest part of the data though came from the Ex-Gas and Autos component, which was 1% MoM was 0.7% MoM expected and 1.2% MoM (revised higher from -0.1%) in March.  With the revisions, the data is strong and doesn’t point to any signs that the American consumer is ready to stop spending, despite inflation remaining near 40-year highs.

The US Dollar Index had a tough time trading through the 161.8% Fibonacci extension from the highs of April 28th to the lows of May 5th, near 104.90,  as sellers entered the market and have been pushing DXY lower over the last 3 days (including today). The next horizontal resistance level above there is from a spike low in 2002 at 105.41.  First support is at the May 5th lows near 102.35.  Below there is horizontal support at the highs of April 19th near 101.00, just ahead of the 50 Day Moving Average at 100.71.

20220517 dxy daily

Source: Tradingview, Stone X

Given that EUR/USD makes up 57% of the US Dollar index, the pair has a high inverse correlation to the DXY.  The bottom panel of the chart shows that the correlation coefficient is -0.98. A correlation coefficient of -1.00 is a perfect negative correlation, meaning the 2 assets move in the same direction 100% of the times.  Therefore, when the DXY trades in once direction , EUR/USD often trades in the opposite direction.

20220517 eurusd daily

Source: Tradingview, Stone X

The pair has been moving lower for months.  The selloff became aggressive when EUR/USD formed a shooting star candlestick on April 21st as price reached a daily high of 1.0936.  However, EUR/USD failed to close below the 161.8% Fibonacci extension from the lows of April 28th to the highs of May 5th, near 1.0365.  In addition, the pair failed to take out the lows of 2017 at 1.0340, which now acts as the first level of support.  Below there, EUR/USD has room to fall to the psychological round number support level at parity (1.0000).  Resistance is at the highs from May 5th at 1.0642 (which confluences with the March 2020 pandemic lows of 1.0635).  The next level of resistance is the bottom, downward sloping trendline from the long-term channel near 1.0690 and then the 50 Day Moving Average at 1.0804.

Never underestimate the American consumer!  Retail Sales continued to be strong in April despite high inflation. Is this just a correction at key levels for the DXY and EUR/USD or will they continue moving in their longer-term trends?  Markets may learn more when Powell speaks later today.

 

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account