FX market reaction to the Italian bond auctions and newest Eurozone data was muted, but today’s US retail sales report is clearly the day’s marquee event, with important implications for EURUSD and USDJPY traders.
It was another quiet night of trade in the currency markets with EURUSD still trapped in a 1.2950-1.3050 range and biased down a bit in mid-morning European action after it saw some selling pressure on the crosses ahead of the Italian bond auction. The bond auction itself went off as well as can be expected given the persistent uncertainty swirling around Italian politics.
Italy was able to sell about EUR 3.3 billion of 2015 BTPs at a yield of 2.48%. This was 18 basis points higher than the prior period. The country also sold about EUR 1.28 billion of 2017 BTPs at a yield of 2.95%, as compared to 2.55% prior.
The modest increases in yields and slight drop in the bid-to-cover ratio indicate the heightened state of risk in the Italian credit markets, but overall, the auction provided neither relief nor concern for the EURUSD and the pair remained relatively steady in the aftermath of the event.
EURUSD Dodges Disappointing Data
Aside from the Italian bond auction, the economic calendar was relatively subdued, with only French non-farm payrolls and Eurozone industrial production on the docket. However, both data releases missed their mark, indicating that conditions on the ground remain challenging and a turnaround in the Eurozone economy is yet to be seen.
Regardless, the EURUSD remains contained in a very tight trading range, and volatility has all but collapsed over the past several days. Such tight trading conditions reflect the state of equilibrium between bulls and bears while currency markets tread water awaiting fresh news. Generally, a break of either the bottom or the top of the EURUSD range should offer the next directional signal in the pair, and it will likely be driven by market perception of whether conditions in the Eurozone are improving or deteriorating.
Today’s Marquee Data: US Retail Sales
Wednesday’s key event is the US retail sales number, which is due at 13:30 GMT. There is a lot of confusion surrounding the report given the number of crosscurrents that could affect the result. The increase in the payroll tax, the start of sequestration, the rise in gasoline prices, and the delay in IRS refunds could all have an impact on the retail sales number.
If retail sales happen to print better than the 0.5% anticipated, it will be yet another confirmation that US economy continues to perform better than consensus view. An upside surprise could also reignite the recent rally in USDJPY and push the pair back through the 96.00 figure, possibly even paving the way for a retest of the yearly highs near the 96.70 level.
See related: Dollar Rallies on Back of Strong Retail Sales
By Boris Schlossberg of BK Asset Management
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