- EUR/USD witnessed heavy selling on Wednesday and retreated further from three-week tops.
- The USD got an additional lift from upbeat US macro data and aggravated the bearish pressure.
- Sustained weakness below mid-1.2000s might have already set the stage for a further downfall.
The USD buying interest picked up pace during the early North American session and dragged the EUR/USD pair to one-and-half-week lows, further below mid-1.2000s post-US macro data.
The pair extended the previous day’s retracement slide from the 1.2170 region, or near three-week tops and witnessed heavy selling for the second consecutive session on Wednesday. The downfall was exclusively sponsored by a broad-based US dollar strength, supported by the recent runaway rally in the US Treasury bond yields.
The US bond market has been reacting to the expectations for the passage of President Joe Biden’s proposed $1.9 trillion stimulus package. This, in turn, fueled hopes for a prompt US economic recovery and a possible acceleration in inflation, which pushed the yield on the benchmark 10-year bond to the highest level since February 2020.
Meanwhile, the prospect of better risk-free returns continued underpinning the USD demand and was seen as a key factor weighing on the EUR/USD pair. The already stronger greenback got an additional boost following the release of stronger-than-anticipated US economic releases – monthly Retail Sales figures and Producer Price Index (PPI) for January.
In fact, the headline sales surpassed even the most optimistic estimates and recorded a strong growth of 5.3% during the reported month. Adding to this, sales excluding autos and the closely watched Retail Sales Control Group rose by 5.9% and 6.0%, respectively, both beating market expectations by a big margin.
Separately, the US Bureau of Labor Statistics reported that the US PPI shot higher to 1.3% in January from 0.3% in the previous month. On a yearly basis, the PPI rose to 1.7% from 0.8% previous and was much higher than consensus estimates pointing to a reading of 0.9%. The data supported the view for a strong US economic recovery from the pandemic.
With the latest leg down, the EUR/USD pair has now found acceptance below mid-1.2000s and seems vulnerable to slide further. Hence, some follow-through weakness back towards challenging the key 1.2000 psychological mark, en-route monthly swing lows near the 1.1950 region, now looks a distinct possibility.
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