EUR/USD faces selling pressure near 1.0740 ahead of US Retail Sales

■EUR/USD finds pressure near 1.0740 as the US Dollar strengths ahead of US Retail Sales data for May.

■The US Retail Sales are expected to have grown by 0.2% after remaining flat in April.

■ECB policymakers remain concerned as the inflation outlook appears to be stubborn.

EUR/USD struggles to extend recovery above 1.0740 in Tuesday’s European session. The major currency pair faces pressure as the Euro remains on the backfoot due to political turmoil in France and strength in the US Dollar (USD) ahead of the United States (US) Retail Sales data for May.

The Euro has been under pressure since French President Emmanuel Macron called for a snap election after the Centralist alliance suffered a defeat from Marine Le Pen's National Rally (RN) in the European Parliament elections. Investors worry that the formation of the RN government would trigger a financial crisis in the European Union’s (EU) second-largest economy. The RN has promised a lower retirement age, energy price cuts, more public spending, and "France first" economic policies in its manifesto.

On the monetary policy front, European Central Bank (ECB) policymakers continue to emphasize keeping interest rates steady in the near term, as an aggressive policy-easing approach could revamp price pressures again. The ECB reduced its Deposit Facility Rate by 25 basis points (bps) for the first time since 2019 in the Jue meeting as price pressures were stubbornly higher due to the Covid pandemic and the Russia-Ukraine war.

Daily digest market movers: EUR/USD exhibits subdued performance 

EUR/USD consolidates in a tight range above 1.0700 as investors shift focus to the monthly US Retail Sales data for May, which will be published at 12:30 GMT. The Retail Sales data – a key measure of household spending – is estimated to have grown by 0.2% after remaining unchanged in April. 

A lower-than-expected rise in the Retail Sales data could result in substantial pressure on the US Dollar as it will boost confidence that the progress in the disinflation process will continue. Currently, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers strongly after correcting modestly to 105.25. Weak Retail Sales data would also prompt market expectations for the Federal Reserve (Fed) to reduce interest rates twice this year.

The CME FedWatch tool shows higher probabilities that interest rates will start declining from the September meeting, with more rate cuts in November or December. On the contrary, upbeat Retail Sales data will strengthen the US Dollar’s appeal and force traders to pare bets that support rate cuts for September. 

Meanwhile, Fed policymakers hold their argument that there will be only one interest rate cut this year. Officials have acknowledged that the progress in inflation declining to the desired rate of 2% has resumed after the Consumer Price Index (CPI) report for May showed that price pressures cooled down more than expected. Though the soft CPI report was a relief for policymakers, they wanted to see inflation declining for months before the commencement of the policy-normalization process.

On Monday, Philadelphia Fed Bank President Patrick Harker supported keeping rates at their current levels for now to maintain downward pressure on inflation in various sectors such as housing and services, notably auto insurance and repairs. When asked about the interest rate outlook, Harker sees one cut in benchmark rate this year if his economic forecast plays out, Reuters reported.

Technical Analysis: EUR/USD remains below 200-day EMA

EUR/USD faces pressure in an attempt to surpass the immediate resistance of 1.0740. The downward-sloping border of the Symmetrical Triangle formation on a daily timeframe, plotted from the high of December 28, 2023, at 1.1140, is acting as a major barrier for the Euro bulls.

The major currency pair is expected to find support at 1.0636, near the upward-sloping trendline of the chart pattern plotted from the low from October 3, 2023, at 1.0448, and the horizontal cushion plotted from April 16 low around 1.0600.

The long-term outlook of the shared currency pair has also turned negative as prices dropped below the 200-day Exponential Moving Average (EMA), which trades around 1.0800.

The 14-period Relative Strength Index (RSI) falls below 40.00. Should the momentum turn bearish if it sustains below the same?