US retail sales data to test DXY's 104 support as Fed bets shift

Traders are bracing for US retail sales and jobless claims data that could determine whether the dollar index holds above 104 or breaks lower.

US retail sales data due Thursday will test the dollar's resilience near the 104 mark on the DXY, with a weaker print potentially accelerating bets on two Federal Reserve rate cuts by year-end.

"A downside miss in retail sales would reinforce the narrative that the economy is cooling, pushing the dollar lower and giving EUR/USD room to test 1.14," said Jane Foley, senior FX strategist at Rabobank.

Economists forecast retail sales rose 0.3% month-over-month in June, down from 0.5% in May, according to a Bloomberg survey. Initial jobless claims are expected to hold near 245,000, a level that has signaled a gradual softening in the labor market. The DXY traded at 104.20 on Wednesday, down 1.2% this month, while EUR/USD climbed to 1.1380 and GBP/USD rose to 1.2980.

The data carries outsized weight after Fed Chair Jerome Powell said this month the central bank needs "more good data" before cutting rates. OIS markets currently price 52 basis points of easing by December, implying two quarter-point cuts. A strong retail sales reading could push that to one, while a miss below 0.1% could open the door to three.

The dollar has weakened 3.4% from its April peak of 107.80 as a string of softer economic readings — from ISM manufacturing to consumer confidence — has eroded the "US exceptionalism" trade that drove the greenback higher through the first quarter. The DXY's 104 level represents a key technical floor; a break below would mark the lowest since March and could trigger further selling from momentum-driven funds.

For EUR/USD, the 1.14 handle is the next resistance after the pair broke above its 200-day moving average last week. The euro has gained 2.1% this quarter as the European Central Bank's cautious easing stance has kept rate differentials with the US from widening further. The spread between two-year US and German government bond yields has narrowed to 175 basis points from 210 bps in April, reducing the dollar's carry advantage.

Sterling has been the best-performing G10 currency this month, with GBP/USD up 1.8% in July as markets price the Bank of England cutting rates only once more this year. The pound's rally has been supported by UK services PMI data that came in at 52.8 in June, above the 50-mark separating expansion from contraction.

The last time retail sales missed consensus by more than 0.3 percentage points was in February, when a 0.2% decline versus expectations of a 0.3% gain sent the DXY down 0.8% in a single session and pushed two-year Treasury yields 12 bps lower. A repeat of that magnitude would likely push EUR/USD above 1.1450 and GBP/USD toward 1.3050, according to options market positioning.

Conversely, a retail sales print above 0.5% would challenge the softening narrative. The Atlanta Fed's GDPNow model currently estimates third-quarter GDP growth at 2.1%, down from 2.8% in the first quarter. A strong consumer spending number could lift that estimate and push rate-cut expectations back toward one quarter-point move, supporting the dollar.

This article is for informational purposes only and does not constitute investment advice.