EUR/USD drifting, German retail sales slide

The euro has stabilized on Wednesday after sustaining sharp losses a day earlier. In the European session, EUR/USD almost unchanged, trading at 1.0550.

German retail sales sink

Germany, the bellwether of the German economy, continues to post soft data. Retail sales were down 0.3% m/m in January, following a 5.3% decline in December and well below the estimate of 2.0%. On an annualized basis, retail sales plunged 6.9% in January, compared to a 6.4% decline in December and shy of the estimate of -6.1%. The soft numbers point to a German consumer who continues to hold tight to the purse strings due to rising costs and a grim economic outlook.

Will the Fed hike by 50 basis points?

The US dollar surged against the majors on Tuesday, boosted by hawkish remarks from Fed Chair Powell who was testifying on Capitol Hill. In his testimony on Capitol Hill, Fed Chair Powell noted that the latest (January) data was stronger than expected and signalled that the Fed would respond with higher rates than it had previously anticipated. Powell said that the Fed would evaluate the need to increase the pace of rate hikes based on the “totality of the data”.

With the disinflation process appearing to stall and the January numbers higher than expected, Powell has the ammunition he needs to maintain a hawkish stance. The markets reacted by raising the likelihood of a 50-bp hike to 70%, up from just 25% prior to Powell’s testimony, according to the CME Group. The Fed projected a terminal rate of around 5.1% in December, but the markets are now expecting it to rise to around 5.6%. If the nonfarm payroll report on Friday is higher than expected, we could see calls for a 6% terminal rate.

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EUR/USD Technical

• EUR/USD is testing support at 1.0547. The next support level is 1.0461
• There is resistance at 1.0620 and 1.0706

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