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EURUSD Forms Head and Shoulders After US Retail Sales Top Forecasts

Forex Focus

EURUSD is unchanged in this morning’s trading after sliding in yesterday’s trading following better-than-expected retail sales data from the US. The currency pair finished yesterday with a 60-pip loss at 1.1262. As of this writing, EURUSD is trading around its opening price at 1.1262.

According to the Census Bureau, retail sales for May grew by 17.7%. Not only was this significantly higher than the 7.9% forecast, the previous reading for April was also revised upward from -16.4% to -14.7%. Meanwhile, the core version of the report showed a 12.4% uptick which also beat the forecast at 5.5%. The reading for April was also updated to -15.2% from -17.2%.

These reports were positive for the dollar because retail sales is the primary report that measures consumer spending. If you remember, the NFP report for May showed skepticism on the economic recovery because of the shortcomings in how the survey was conducted. However, this surge in consumer spending in May implies that people had more capacity to spend. And so, it could be a sign that the jobs report for May does reflect significant developments in the economy.

Another reason why upward movement on EURUSD is limited today is because of risk aversion. Beijing has imposed a lockdown as coronavirus cases rise. There are also reports of increased tension in the Korean peninsula with North Korea supposedly blowing up the inter-Korean liaison office. With this, the market’s risk-off mood has triggered flows into safe haven currencies like the US dollar. 

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EURUSD Outlook

On the 4-hour time frame, it can be seen that EURUSD made lower higher after a series of higher highs. Consequently, a head and shoulders chart pattern has materialized. When you enroll in our free forex trading course, you will learn that this is widely considered as a bearish reversal signal. A strong bearish close below 1.1210 could mean that the neckline support has been invalidated. It could trigger a bigger sell-off on EURUSD which could go all the way down to 1.0886 where it bottomed on May 25.

On the other hand, a close above yesterday’s highs at 1.1352 could mean that there are stil buyers in the market. It may invalidate the head and shoulders pattern and trigger a rally to last week’s highs at 1.1421.