Since the start of this week's trading, the price of the euro currency pair against the US dollar, EUR/USD, has stabilized around its strong gains. It has reached the resistance level 1.0482, its highest in five months, and settled around 1.0390 at the time of writing. So far, the US dollar remains the weakest since the announcement of lower-than-expected US inflation numbers, forcing the Fed's monetary policy officials to calm down the tightening tone.
US retail sales were much higher than expected in October, but there are signs that this spending is being funded by a growing debt burden that provides flashbacks to behavior that preceded the 2008-2009 recession. US retail sales were reported to have risen 1.3% in October, an acceleration from the 0% recorded in September, and ahead of the 1.0% increase the market had expected.
Core retail sales were even more robust, posting an impressive gain of 1.3%, more than triple the market's forecast of 0.4% and the 0.1% printed in September. “The alarming volatility in spending is nowhere to be seen, despite the significant pressure on real income,” says Kieran Clancy, chief economist at Pantheon Macroeconomics. “People have been willing to drain savings built up during the pandemic to maintain consumption as incomes shrink. Real, and they can continue to do that for some time yet.”
Thus, the consumer is willing to spend, which is likely to keep inflation high and somewhat pushes the notion that the Fed can afford to relax and end the rate hike regime. Remember, the drop in inflation reported last week, supported by weaker-than-expected PPI inflation for this week, has pushed the dollar higher in recent days.
The US retail figures provide an antidote to this theme, and the US dollar found some relief as a result. But Tim Quinlan, chief economist at Wells Fargo Securities, says consumers are struggling to keep up. “The last time credit card borrowing was growing as it is now, we were heading into the 2008-2009 recession,” he says in a note following the retail sales release. “Even as consumer resilience continues, some cracks are slowly forming in the foundation.”
Wells Fargo economist adds that households have increasingly relied on credit for spending, and total debt increased by $351 billion in the third quarter. That puts the total debt burden of households at $16.5 trillion, according to data released yesterday by the New York Federal Reserve. Accordingly, the analyst adds, “This is an increase of 8.3% over the previous year, which is the largest annual increase since a jump of 9.1% in the first quarter of 2008 at the beginning of the 2008-2009 recession.”
The increase in borrowing to boost spending comes despite the Federal Reserve raising short-term interest rates from a high range of 0.25% earlier this year to 4.00% for the time being. The fastest increase in short-term borrowing costs since the 1980-82 tightening cycle. However, this increase in financing cost will catch up with consumers and will greatly affect future spending.
Euro predictions against the US dollar today:
- There is no change in my technical point of view for the performance of the price of the EUR/USD currency pair.
- The general trend is still bullish and stability is above the psychological resistance 1.0400.
- This is confirming the bulls’ control over the trend. Pushing the technical indicators towards overbought levels, the currency pair is exposed to profit-taking sales at any time.
- I expect selling from the resistance levels 1.0465 and 1.0520, respectively.
On the other hand, according to the performance on the daily chart below, the euro-dollar will abandon the upward path, in the event that it returns to the vicinity of the support level 1.0120 today. The euro will be affected by the announcement of inflation numbers in the eurozone. The US dollar will be affected by the weekly jobless claims, the Philadelphia Industrial Index and the housing market numbers.
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