EUR/USD: How to trade US retail sales, five scenarios, levels to watch

• Economists expect US Retail Sales to have fallen in September. 
• The Fed´s slower than expected tapering pace implies the greenback is on the back foot.
• Five scenarios await EUR/USD in response to this top-tier data point.

Never underestimate the US consumer – shopping is central to America’s economy, but with cuts to unemployment benefits, economists expect a pause in expenditure. As the last top-tier release of the week, the greenback is set to react. 

Quick background

Roughly 70% of the world’s largest economy is centered on consumption, and pandemic-related stimulus checks have pushed that forward. In September, a mix of higher inflation – 5.4% YoY – and the expiry of a federal top-up to jobless benefits has likely pushed spending down by 0.2%, according to the economic calendar. 

A weak figure would show that the economy is slowing down, thus negative for the dollar, while a strong outcome would show that the recovery from the pandemic is going strong – dollar positive.

Sentiment and Levels

Contrary to early in the week, the wind is now blowing against the dollar. The Federal Reserve’s meeting minutes showed that the world’s most powerful central bank is set to reduce stimulus – but do it gradually. The Fed will taper its $120 billion/month bond-buying scheme at a pace of $15 billion/month rather than $20 billion that some had expected. 

Moreover, the market mood improved in response to efforts to alleviate supply chain issues, such as work around the clock in LA’s ports. A better market mood means a weaker dollar – and that sentiment will likely persist.

Levels from top to bottom: 1.1705 (late-September high), 1.1670 (late-September low point), 1.1640 (early October swing high), 1.1610 (early October cap), 1.1585 (mid-October resistance), 1.1560 (early October support), 1.1540 (mid-October support), 1.1525 (2021 low), 1.15 (psychologically significant level).

Five scenarios for EUR/USD

Expectations stand at -0.2% for Retail Sales, and the volatile nature of this indicator implies a broader range.

1. Within expectations: Any outcome between -0.4% and 0% could be considered in range, especially as revisions to previous months tend to skew the response. EUR/USD will likely edge higher, yet remain in the range – breakouts are unlikely. 
2. Above expectations: A positive result of +0.1% to +0.5% is moderately above estimates and would already boost the dollar. However, there is limited scope for EUR/USD to break lower, given the bias against the dollar.
3. Well above expectations: Any figure that is +0.6% or higher would already send EUR/USD significantly down, potentially slipping below one support line.
4. Below expectations: A drop in retail sales of between 0.5% to 1% would be considered below estimates and could send EUR/USD above one resistance line. 
5. Well below expectations: A devastating fall of over 1% would already fully reverse last month’s gains and could trigger a substantial EUR/USD rally – potentially above two resistance lines.