Will a potential dollar recovery signal an end to the EUR/USD rally?

As the US dollar has cautiously begun what ultimately may become a bottoming-out and recovery after a prolonged period of weakness, the strong EUR/USD rally since the beginning of the year has begun to show some cracks this month. Since early August, EUR/USD has come down off its multi-year high just above 1.1900 and has formed a clear consolidation pattern for the past two weeks. This consolidation is roughly bounded by the 1.1700 level to the downside and 1.1900 to the upside.

On Tuesday, the dollar surged further after the release of substantially better-than-expected US retail sales data. For July, retail sales grew by 0.6% against a previous consensus forecast of around 0.3%. Similarly, core retail sales (excluding automobiles) grew by 0.5% against a previous forecast also at 0.3%. As a result, Tuesday’s further boost for the dollar helped bring EUR/USD back down to key short-term support around the 1.1700 level before bouncing and paring some of those losses.

Looking ahead this week, the key driver for the dollar – the Federal Reserve – will take center stage once again as it releases minutes from the late-July FOMC meeting on Wednesday. Any hint of hawkishness emanating from those meeting minutes is likely to be considered a substantial positive for the long-pressured dollar. If this is indeed to be the case, the dollar could receive an extended boost after Tuesday’s data-driven strength. With any sustained breakdown below 1.1700 support – the lower boundary of the current consolidation – price action will have signaled further dollar-driven pressure on EUR/USD, potentially pushing the currency pair towards a short-term downside target around 1.1600 support and a medium-term bearish objective around the key 1.1300 support level.

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