US Dollar May Extend Gains vs. Euro, Retail Sales and PPI Data Eyed

CHINA STOCKS, PBOC, FED, US DOLLAR, RETAIL SALES, PPI, EUR/USD – TALKING POINTS:

  • Chinese stocks drop amid worries about tightening liquidity conditions
  • US PPI, retail sales data in focus as markets weigh Fed policy outlook
  • EUR/USD may be set for deeper losses after completing topping setup

Financial markets are off to a relatively quiet start as bourses in Australia and China return from Monday’s holiday closures. Mainland and Hong Kong shares declined amid liquidity concerns after the PBOC rolled over CNY200 billion in expiring 1-year loans but stopped short of adding more capital into markets.

The overnight repo rate – a measure of shirt-term borrowing costs – leaped higher while the benchmark CSI 300 stock index dropped. Liquidity concerns have been front-of-mind for Chinese markets recently as measures of local financial conditions signaled tightening through April and May.

That didn’t seem to spill out beyond Chinese markets however. Performance looked staid in the G10 FX space and bellwether S&P 500 index futures are trading higher, pointing to broad (if cautious) risk-on tilt in underlying market sentiment trends. Softs and industrial metals led commodity prices lower.

US PPI, RETAIL SALES DATA IN FOCUS AS MARKETS WEIGH FED OUTLOOK

German CPI and UK labor market data did not appear to stir speculative spirits, putting the spotlight on US retail sales and PPI figures due later in the day. Receipts are seen cooling a bit in May after holding at a record high in the prior month while core wholesale inflation is pegged at a decade high of 4.8 percent on-year.

US economic data outcomes – and price growth measures in particular – have firmed relative to baseline forecasts recently. More of the same this time around may help stoke Fed stimulus withdrawal bets ahead of Wednesday’s much-anticipated FOMC meeting, pushing the US Dollar upward.

EUR/USD TECHNICAL ANALYSIS – DOLLAR AIMS TO EXTEND GAINS VS. EURO

EUR/USD turned lower as expected, making good on a Rising Wedge chart formation punctuated by a Bearish Engulfing candlestick pattern as well as negative RSI divergence. From here, a daily close under swing low support at 1.2104 may set the stage for a test below the 1.20 figure.

Neutralizing selling pressure seems to demand for the single currency to re-establish a foothold above 1.2266, the May 25 high. Such a move would violate the series of lower highs and lows establishing the near-term downtrend and may set the stage for a further rise to challenge the 2021 peak at 1.2350.

US Dollar May Extend Gains vs. Euro, Retail Sales and PPI Data Eyed

EUR/USD daily chart created withTradingView

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— Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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