EUR/USD supported near 1.0878 & 1.0770 on chartsU.S. retail sales a wild card as Chinese data pose riskIf signs of economic improvement reverse RMB trend Second tier European economic figures in back seats

Image © European Commission Audiovisual Services

The Euro to Dollar exchange rate fell to a one month low to open the new week and could see further losses push it back below 1.08 in the days ahead if the Euro-Renminbi pair corrects lower or if risks stemming from U.S. and Chinese economic figures crystalise for the single currency.

Europe’s single currency had remained pinned down around the middle of a two-month range against the Dollar throughout last week but broke below a notable level of technical support at 1.0954 on the charts during Monday trade and ahead of a busy schedule of trilateral risk in the economic calendar.

Local data highlights include Germany’ ZEW survey of investor sentiment on Tuesday as well as later releases of the second estimate for economic growth last quarter and the second reading of Euro Area inflation rates for July on Wednesday and Friday respectively.

European employment figures and the latest update on the trade balance are also due Wednesday and Thursday but for the Euro to Dollar rate, the more important factors might well be the Tuesday release of U.S. retail sales figures for last month as well as a prior flurry of Chinese economic figures, and price action in EUR/CNH.

“Ahead of the data, our US economist is looking for continuing recovery of domestic demand albeit at a slower pace than expected by consensus. In addition, the Fed minutes should offer some insights on the debate at the FOMC about the need for further monetary policy tightening,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB.

Above: Euro to Dollar rate shown at daily intervals with selected moving averages Fibonacci retracements of May rally indicating possible areas of technical support for single currency. Click image for closer inspection. Shown alongside S&P 500 index future.

“We believe that more evidence that the US consumers remained undaunted by the persistent tightening of the financial and credit conditions and that the Fed hawks remained as vocal as ever arguing for further hikes could help the USD hold on and even extend its recent gains,” he adds in a Monday research briefing.

The Dollar and Euro reactions to positive and negative U.S. economic data have been mixed in recent weeks, making the market response to Tuesday’s U.S. retail sales data something of a wild card, but more important for EUR/USD might well be the Chinese economic data due on Tuesday and Renminbi exchange rate response to it.

This is partly because of entrenched pessimism in and around the market when it comes to the outlook for China’s economy and an ongoing downturn in the residential property market but is also due to the support EUR/USD appears to have received from the uptrend in EUR/CNH over recent months.

“Concerns over liquidity of one of the country’s biggest property developers, Country Garden Holdings Co, brought back into the focus the troubled property sector, a key source of demand for copper. Meanwhile, China’s loan growth increase in July was also the smallest since the financial crisis,” he adds in a Monday market commentary,” says Ole Hansen, head of commodities strategy at Saxo Bank.

EUR/CNH and other Renmimbi-facing pairs have been in an extended uptrend since at least late February when the trend in the trade in goods balance and local foreign exchange reserves began to turn higher, while the Renminbi downtrend relative to the Dollar has accelerated along the way.

Above: Euro to Dollar rate shown alongside EUR/CNH and GBP/CNH. Includes Chinese foreign exchange reserves (orange) and Chinese trade surplus (purple). Illustrates how currency reserves and trade surplus have risen since February with the decline of the Renminbi and increase in USD/CNH, EUR/CNH and GBP/CNH.

The extended run of losses in Renminbi pairs has played out alongside a recovery in EUR/USD and one that has been synchronous with that in EUR/CNH since late in May while the only interruption of these trends followed last month’s release of the same Chinese data due out on Tuesday.

EUR/USD and EUR/CNH both initially benefited in late July while the Dollar sold off when June’s Chinese GDP, fixed asset investment, industrial production and retail sales figures revealed signs of a pickup in some parts of the economy but Euro pairs later fell when the Renminbi itself rebounded from its earlier losses.

The latter market response is potentially something that could be seen again on Tuesday and the days after if the latest data provides any hint of an economic pick up being in the pipeline, and particularly in light of how negative market sentiment about the Chinese economic outlook has become.

“While the strength of the post-covid economic rebound has undoubtedly disappointed, Chinese growth still looks set to be around 5% this year, compared with no more than 2% in the US and an anaemic 0.5-1% in the Eurozone and UK,” says Rupert Thompson, chief economist at Kingswood.

“Importantly, high youth unemployment and the absence of inflation mean the authorities should continue to introduce further piecemeal stimulus measures. There is currently no sign of a bazooka being launched, but then again no-one expected last year’s overnight U-turn in Covid policy,” he adds.

Above: Quantitative model estimates of possible ranges for the week. Source: Pound Sterling Live.