Friday, August 14, 2020

Will retail sales and consumer sentiment be another catalyst for a dollar devaluation?

Tags
  • Dollar
  • Euro
  • US Retail Sales

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Analysts’ Pick: Will retail sales and consumer sentiment be another catalyst for a dollar devaluation?

  • Headline retail sales data for July looks likely to be boosted by improving auto sales, but an improvement may be lower than expected as gas prices and demand starts to slow.
  • Core retail sales for July looks tilted towards undershooting expectations as well, with consumers more likely to save cash due to uncertainty surrounding stimulus measures and the expiration of enhanced unemployment benefits.
  • Likewise, a one-week absence of enhanced unemployment benefits is likely to weigh on sentiment for August, along with concerns on an economic recovery.
  • EUR/USD may have some slight upside today as a result, but upside potential should be limited given that the dollar has shifted into a correction phase.

The Eurozone's second estimate for Q2 GDP is set to be released, along with consumer-centric data in the US later today which should push the EUR/USD currency pair to traders' focus of the day. Fibre is currently trading a touch below its two year high at 1.1877, at a range between 1.1738 and 1.1847 after the month-long bull run that major currencies experienced against the dollar. With potentially weak retail sales and consumer confidence likely to continue to fall in the US, the dollar may have more room to decline as investors shift away from the reserve currency. A possible downward revision to the EU's Q2 GDP may put some pressure on the euro, which should even out the impact of a declining dollar on the release of the datasets and continue to allow the currency pair to trade within its current range.

EUR/USD has gained 9.92% over the course of eleven weeks since the middle of May

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Retail sales for July almost definite to only show a fraction of June's rebound. Auto sales continued to improve through the month, which should provide a small boost to the headline figure. Gas prices remained relatively stable through July with only a slight overall increase over June. Implied demand for gasoline fluctuated in July, but still managed to show a net improvement over the month. Hence, headline retail sales look likely to continue to show improvements from June, boosted by improvements in auto and gas sales, but at a much slower pace than before.

Auto and gas sales should continue to boost headline retail sales, but at a much slower pace than before

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Falling consumer sentiment on the other hand, signals possible weakness in core retail sales (excluding auto and gas) as spending is more likely to have at most a marginal improvement from June given that consumers are more likely to save after an initial spending spree in May and June. Consumers are also likely to take into consideration the expiration of enhanced unemployment benefits at the end of July, which we saw in the initial jobless benefit claims dataset for the final week of July as well. This implicitly means that better off consumers may have started to increase savings ahead of the expiration to maintain liquidity while more vulnerable households would have decreased spending if possible, ahead of the expiration of enhanced benefits. As a result, retail sales data looks likely to skew towards the downside and possibly come in lower than expected.

Weak consumer expectations and a slowdown in improvements in current situation confidence suggests that consumer spending is likely to have been impacted during July as well

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Similarly, consumer sentiment should continue to dampen in August thanks to stalled stimulus negotiations, in addition to high levels of unemployment and reduced unemployment benefits. The weakness in consumer sentiment we saw in July is likely to continue into August as well. The one-week absence of enhanced unemployment benefits coupled with debt obligations is likely to result in a wider overall dampening of consumer sentiment as well.

The dollar should as a result face more downward pressure as a weaker US economic recovery is likely to incentivise a greater shift away from the dollar, or at least a hedge against greater devaluation. EUR/USD may hence be able to retest the 1.1852 resistance level, and may very well break it but continue to trade below the two-year high of 1.1904 as gains will probably be limited by reduced downside potential for the greenback after the eleven-week decline.

But while we expect a net upward impact on EUR/USD on the release of the datasets today, it is looking more likely to take a backseat in terms of long-lasting impact on the dollar. Instead, the major concerns for greenback investors will be the November presidential elections and fiscal stimulus measures from the White House and Congress. Investors may be starting to price in a higher likelihood of a Joe Biden presidency following his pick in former California District Attorney Kamala Harris as his presidential running mate. As for the ongoing stimulus negotiations, the concern will likely be how long a timeframe will lawmakers need to come to a consensus on the measures. Signals from the past week from various lawmakers suggests that both parties are still far from a consensus with disagreements on key aspects such as the overall size of the legislation. While markets will be sensitive to stimulus news, the likelihood of Congress eventually passing a stimulus bill is greater than not since it’s not in either party's interests to be the cause for a stalemate in negotiations.

Technical Analysis:

EUR/USD

Euro and dollar bulls are in a close fight for possession for the EUR/USD currency pair. While traders have turned largely bearish on the dollar over the past two months leading to an overall decline of almost 10%, a correction has taken place over the past week, reversing some of the gains that euro bulls have made. This correction is likely due to profit taking, which suggests that EUR/USD may have some slight upside in the short-term, with a strong resistance at 1.1914’s level. Fundamental data may skew Fibre towards breaking the 1.1852 resistance today day, but we think that the upside should be limited as dollar bulls fight to keep the currency from free falling any further. Over the longer-term, we may see another larger correction closer towards the 200-and-50 day moving averages, although it looks unlikely to break those key levels in the near future.

Support: 1.1782 / 1.1706 / 1.1625

Resistance: 1.1852 / 1.1904 / 1.2023

EUR/USD Chart (H4)

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