The euro traded in a narrow range against the U.S. dollar on Tuesday, as traders balanced stagnant economic data from Germany against growing expectations of a U.S. Federal Reserve interest rate cut. The EUR/USD pair hovered around 1.1530, unable to break significant resistance ahead of key U.S. economic reports due later in the day.
Market participants are closely watching for the release of U.S. Retail Sales and Producer Price Index (PPI) figures, which could provide new clues about the health of the American economy and influence the Federal Reserve's next policy move.
Key Takeaways
- The EUR/USD currency pair is trading in a tight range, capped below the 1.1550 resistance level.
- Germany's economy showed zero growth in the third quarter, confirming a period of stagnation.
- Federal Reserve officials' recent dovish comments have pushed market expectations for a December rate cut above 80%.
- Investors are awaiting the release of U.S. Retail Sales and Producer Price Index (PPI) data for fresh market direction.
German Economic Stagnation Weighs on Euro
The euro found little support from domestic data after figures released Tuesday confirmed Germany's economy stalled in the third quarter. Gross Domestic Product (GDP) registered 0% growth, following a 0.3% contraction in the second quarter, highlighting persistent weakness in Europe's largest economy.
On a year-over-year basis, the German economy grew by a modest 0.3%. This data follows a recent German IFO Business Climate report which also pointed to deteriorating economic expectations among businesses.
Understanding Economic Indicators
Gross Domestic Product (GDP) measures the total value of goods and services produced in a country and is a primary gauge of economic health. The IFO Business Climate Index is a leading indicator for economic activity in Germany, based on surveys of manufacturers, builders, wholesalers, and retailers.
The sluggish performance of the German economy acts as a significant headwind for the common currency, limiting its ability to rally even as the U.S. dollar faces its own pressures.
Federal Reserve Dovishness Pressures the Dollar
While the euro struggles with economic concerns, the U.S. dollar is under pressure from a different source: the Federal Reserve. Recent comments from Fed officials have signaled a growing willingness to cut interest rates to support a weakening labor market and cooling inflation.
Fed Governor Christopher Waller recently advocated for a quarter-point interest rate cut next month, echoing similar dovish sentiment from New York Fed President John Williams. These statements have had a significant impact on market sentiment.
Rate Cut Expectations Soar
According to the CME Group's FedWatch Tool, the probability of a 25-basis-point interest rate cut by the Federal Reserve at its December 10 meeting has surged to over 80%. This is a sharp increase from just 40% one week ago.
Expectations of lower U.S. interest rates make the dollar less attractive to investors seeking higher yields, causing the U.S. Dollar Index (DXY) to trade at the lower end of its recent range.
All Eyes on U.S. Retail Sales and Inflation Data
With the European and U.S. narratives creating a stalemate, traders are looking to the next batch of U.S. economic data for a catalyst. The delayed release of September's Retail Sales and Producer Price Index (PPI) figures is the main event of the day.
Economists expect the headline Producer Price Index, a measure of inflation at the wholesale level, to show a yearly increase of 2.7%, slightly higher than the previous month's 2.6%.
Key U.S. Data to Watch:
- Retail Sales (MoM): Consensus forecast is for 0.4% growth, a slowdown from the 0.6% recorded in August.
- Producer Price Index (YoY): Expected to rise to 2.7% from 2.6%.
- Core PPI (YoY): Forecast to ease slightly to 2.7% from 2.8%.
Stronger-than-expected inflation or retail sales could challenge the narrative of a slowing U.S. economy and might reduce the certainty of a Fed rate cut, potentially boosting the dollar. Conversely, weak data would likely reinforce expectations for monetary easing and could send the dollar lower.
EUR/USD Technical Outlook
From a technical standpoint, the EUR/USD pair remains in a tight consolidation pattern. For the past three trading sessions, any upward movement has been stopped by resistance at the 1.1550 level.
The currency pair is currently trading above the key psychological level of 1.1500. A sustained break below this support could signal renewed bearish momentum, opening the door for a retest of recent lows near 1.1470.
To the upside, buyers would need to decisively clear the 1.1550 resistance to gain control. A successful move higher could target the next resistance zone around 1.1600. Technical indicators suggest the recent rebound is fragile, indicating that the broader bearish trend remains intact until key resistance levels are broken.
