EUR/USD. PPI, Retail Sales and the Iran case

[Ben Graham]

The EUR/USD pair remains range-bound, reflecting indecision among both buyers and sellers. For the second week in a row, the pair has been trading within the 1.16 figure, reflecting current news flow in this price range.

Macroeconomic reports that could "stir" the pair have been pushed to the background, since all traders' attention is focused on geopolitical events. But here the situation is also rather contradictory. On the one hand, incoming signals are aggravating (primarily in the context of Iran), fueling risk-off sentiment. On the other hand, threats issued by the US are, in practice, not being realized — words remain words. Regardless of whether that is good or bad, the fact remains: the bleakest geopolitical scenarios (so far) are not materializing. Nevertheless, overall market nervousness persists.

In such conditions of global uncertainty, traders prefer not to open large positions, neither for nor against the dollar. Therefore, the EUR/USD pair continues to drift around the 1.16 level, reacting impulsively to current fundamental events.

For example, on Wednesday, background support for the US currency came from the PPI and Retail Sales reports, which came in the "green zone."

Thus, the Producer Price Index unexpectedly rose to 3.0% y/y — both headline and core — whereas most analysts had forecast a slowdown to 2.7%.

EUR/USD traders reacted coolly to the release (the pair fell only about 30 pips), despite the acceleration of one of the key inflation indicators. This can be explained by several reasons.

First, the PPI report was for November. The release was delayed due to the prolonged shutdown, so the market treated it as a retrospective event.

Second, the structure of the published report points to persistent inflationary pressure mainly in the services segment, while price dynamics in goods remain very restrained — the rise is more inertial and is mainly linked to costs and wages rather than overheating demand. In addition, limited dynamics in trade-mark-ups reduce the probability that price pressure is "passed through" to the consumer level, i.e., that PPI growth translates into CPI. And since there are no clear prerequisites for an acceleration of consumer inflation, the release does not look "hawkish" to the market.

Traders also reacted tepidly to the other fairly important US report published on Wednesday— Retail Sales. Although all its components are printed in green. Total retail sales increased by 0.6% in November after a 0.1% decline in the previous month (forecast 0.5%). Excluding auto sales, the indicator rose 0.5% after a 0.2% rise in October (forecast 0.4%).

The market's phlegmatic reaction is due to several reasons.

Like the PPI, this is a "late" report — in mid?January, we learned the November figures. The reason again is the shutdown. But traders ignored the publication for more than that reason. The point is that the November rise in Retail Sales fell on the pre-holiday and holiday season (Thanksgiving, Black Friday, preparation for Christmas and New Year). Positive dynamics were observed mainly in seasonal and volatile categories (autos, gasoline, holiday goods), while underlying demand remained moderate. Such a situation signals stability in the consumer sector, but does not indicate accelerating inflation. The market saw nothing extraordinary and simply ignored the release.

In other words, macroeconomic reports, despite their status and significance, failed to provoke volatility in the EUR/USD pair.

Geopolitical fundamental factors did not help market participants either. Thus, on Wednesday, Reuters cited a source saying the United States could strike Iran "within the next 24 hours." Against this backdrop, Iran and Iraq closed their airspace overnight into January 15.

But later, Donald Trump indicated he would refrain from attacking Iran for now. According to him, the US received information that "killings in that country have stopped." The night passed calmly, and Iran has already reopened its airspace, as shown by Flightradar24 data.

In addition, Trump said he had a "very productive" conversation with interim Venezuelan president Delcy Rodriguez, speaking of a potential partnership between Washington and Caracas. The day before, the US president held a phone call with the Mexican leader: by their own admission, the dialogue was also "very productive."

Markets calmed down somewhat, risk-off sentiment eased, and the dollar stopped enjoying elevated demand. EUR/USD, in turn, continues to trade sideways. In such conditions, it is advisable to stay out of the market, since participants still cannot determine the price's directional vector, playing out the current information flow within the narrow price range 1.1620–1.1660 (the lower and middle Bollinger Bands on the H4 timeframe).

The material has been provided by InstaForex Company - www.instaforex.com