US Retail Sales Preview: Strong July reading could help US Dollar stage another rally

• United States Census Bureau will release the July Retail Sales data on Tuesday, August 15.
• US Retail Sales are seen advancing by 0.3% in July after rising less than forecast in June.
• Strong US Retail Sales could revive hawkish Fed bets, boosting the US Dollar.

The United States (US) Census Bureau will publish the country’s Retail Sales report on Tuesday, which is expected to show that the headline Retail Sales number will rise for the third straight month in July. The US consumer spending is likely to show continued resilience, indicating an optimistic outlook for the economy heading into the third quarter.

The United States Dollar (USD) has been consolidating at its highest level in four weeks even after tame United States Consumer Price Index (CPI) data, which briefly cemented expectations that the US Federal Reserve (Fed) is nearing the end of its tightening cycle. US annual headline CPI rose 3.2% in July against a 3.0% increase recorded in June and 3.3% expectations. The Core CPI inflation ticked down to 4.7% YoY in the reported period vs. a 4.8% clip estimated. On a monthly basis, both the headline and Core inflation figures met expectations, arriving at 0.2%.

However, San Francisco Fed President Mary Daly came to the rescue of the Fed hawks, as she said in an interview with Yahoo Finance that “it is not a data point that says victory is ours. There’s still more work to do. And the Fed is fully committed to resolutely bringing inflation back down to its 2% target.”

As the Fed policymakers have repeatedly said that monetary policy moves will depend on incoming data, the focus shifts toward the US Retail Sales report. The high-impact US data release could prompt markets to re-price the Fed interest rate outlook, ramping up volatility around the US Dollar.

What to expect in the July US Retail Sales report?

The headline Retail Sales are likely to increase 0.4% over the month in July, at a slightly faster pace from the 0.2% growth seen in June. Core Retail Sales, excluding autos, are also seen rising 0.4% in July, as against a 0.2% increase recorded in June. US Retail Sales Control Group is expected to increase 0.5%, courtesy of the growth in online sales.  
It’s worth mentioning that the Retail Sales data is adjusted for seasonality but not for inflation.

The potential growth in US Retail Sales could continue to show robustness in consumer spending, despite the Federal Reserve’s implementation of 500 basis points (bps) worth of interest rate hikes since March 2022.

The July retail volume data came in mixed, suggesting a slowdown in the momentum of spending growth. However, that did not alter the Federal Reserve’s decision to hike the policy rate, federal funds rate, by 25 bps to the range of 5.25-5.5% last month.

According to analysts at BBH, “markets should not just rely on retail sales data to gauge the strength of the consumer, as it only covers goods. Personal spending covers services as well and will give a much fuller picture, but the July reading won’t be reported until July 28 along with PCE data.” 

When will US July Retail Sales data be released and how can it affect EUR/USD?

The US Retail Sales data for July is due to be published at 12:30 GMT on Tuesday, August 15. Investors are weighing in on the next Fed policy path, keeping the upside capped in the US Dollar. Therefore, the EUR/USD pair could extend its bearish consolidative phase. Upbeat US Retail Sales data could reinforce the buying interest in the Greenback, fuelling a fresh downtrend in the main currency pair.

Conversely, if the details of the Retail Sales report disappoint, hopes of any further Fed rate hike will be crushed alongside the US Dollar. Worries over a potential ‘soft-landing’ will resurface, which could limit the US Dollar’s weakness. Markets are currently pricing in about a 25% probability of one more Fed rate increase this year, as per the CME Group FedWatch Tool.

Meanwhile, Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “The 14-day Relative Strength Index (RSI) on the daily chart retreated below 50 and EUR/USD closed below the 100-day Simple Moving Average (SMA) for the first time in nearly two months, reflecting a bearish bias."

Eren also outlines important technical levels to trade the EUR/USD pair: “On the downside, 1.0850 (static level) aligns as interim support before 1.0770 (200-day SMA) and 1.0680 (static level from June). Looking north, buyers could show interest in case EUR/USD makes a daily close above 1.0940 (100-day SMA) and starts using that level as support. In that scenario, 1.1000 (20-day SMA, psychological level) could be seen as the next recovery target ahead of 1.1150 (July 27 high)."