Heading into today’s big data dump out of the U.S., traders were already on edge after the recent perilous drop in global equities and growing fears of Eurozone Sovereign Debt Crisis 2.0. Over the last few months, the U.S. economy has always rode in on a white horse at times like this to assuage concerns of a coordinate economic slowdown, but today, the white horse was more of a lame mule.
Expectations for the most widely-watched release of the day, September’s Retail Sales report, were already subdued after a particularly strong +0.6% reading last month, but even that low hurdle proved too difficult to clear. The consumer measure printed at -0.3% m/m, missing the -0.1% anticipated reading, and even the core report, which filters out volatile automobile purchases, disappointed investors at -0.2% vs. +0.2% eyed.
Today’s other U.S. economic reports only added insult to the retail sales injury. The Producer Price Index (PPI) measure of inflation unexpectedly fell 0.1% m/m, a big miss from the 0.1% rise that traders had been anticipating. This low inflation reading suggests that the stubborn deflationary pressures in the Eurozone may be starting to cross the Atlantic, a concern we noted in yesterday’s article, “EURUSD: European Spelling Bee.” Unfortunately, early readings suggest that the U.S. economy may be deteriorating further this month, with October’s Empire State Manufacturing Index showing its biggest miss relative to expectations since June 2011 at just 6.2 vs. 20.3 eyed.
So what is the upshot of all these weak U.S. reports? The first and most obvious implication is that the Federal Reserve may have to push back its rate hike plans further, especially if inflation numbers continue to disappoint (see “EURUSD Breaks Out of Bearish Channel on Fed Minutes, Where to Now?” for more). Meanwhile, weakness in the world’s largest economy could keep pressure on global equity markets, especially after yesterday’s short-lived bounce.
Technical View: EURUSD
Looking to the chart of the world’s most widely-traded currency pair, the euro is in rally mode against the greenback in early U.S. trade. Though it's still early, the daily chart is showing a potential Bullish Engulfing Candle* (indicating a dramatic shift from selling to buying pressure) and the MACD indicator has turned higher to cross above its signal line (showing that the selling momentum is waning).
At this point, the longer-term downtrend remains intact, but all eyes will be on the 1.2800 handle over the rest of the week. If bulls can push the pair above that key line in the sand, a continuation toward the 38.2% Fibonacci retracement and the 50-day MA near 1.2960 could follow. On the other hand, if growing fears about the Eurozone’s periphery trump concerns about a potential slowdown in the US, the EURUSD may reverse off 1.2800 resistance and eventually drop back toward the early October low at 1.2500.
*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous period before buyers step in and push rates up to close above the high of the previous candle. It indicates that the buyers have wrested control of the market from the sellers.