US economic exceptionalism is showing signs of fading as softer , inflation and employment data weigh on the dollar. Meanwhile, stronger Euro area data and a widening economic surprise gap are raising the prospect of a breakout.
- US retail sales post first decline in nine months
- US data undershoots weigh on
- European-US relative economic data surprises widest since 2023
- EUR/USD closes above 100DMA for first time since May
In what has been a rarity for large periods this year, US economic data is starting to whiff, weighing on the US dollar. At the same time, data in the Euro area is perking up, raising questions over whether EUR/USD can capitalise.
With little on the calendar this week to question the prevailing narrative, greater emphasis may fall on price action to determine whether that breakout plays out.
Retail Sales Add to US Data Slump
US fell 0.6% in July, according to data released last Friday, significantly undershooting expectations for a 0.1% increase and marking the first decline in nine months. Control group retail sales, which feeds more or less directly into GDP, were also very soft, falling 0.4% against expectations for a 0.3% increase, with prior data also revised sharply lower.
The weak report followed very soft and readings earlier in the week, along with a surprise decline in for July reported the previous Friday, raising questions over whether the US economic exceptionalism that has bolstered the US dollar for large parts of this year may be keeling over.
DXY Feels the Data Drag
Whether or not that proves to be the case, it is clear from the graphic below that the run of softer-than-expected economic prints is weighing on the narrow US dollar index, or DXY.
Source: LSEG, FOREX.com
It tracks the rolling correlation coefficient between Citi’s US Economic Surprise Index, which measures how economic data prints relative to market expectations, and the DXY. At +0.85 over the past 20 trading days and +0.81 over the past 40, the relationship is statistically meaningful, suggesting the flow of US economic data has been an influential factor in the dollar’s overall performance. While there are signs the relationship has become less consistent over very short timeframes, it nonetheless remains positive.
Correlation coefficients measure the directional relationship between two variables, ranging from +1 for a perfect positive relationship to -1 for a perfect inverse relationship. While correlation does not mean causation, the strength of the scores reinforces the link between economic data surprises and the DXY.
DXY Price Action Turns Heavy
Source: TradingView
After threatening to break to fresh 2026 highs in late July, DXY has stumbled in recent times, breaking the minor uptrend that had been running from the low set following the Fed meeting. The price also broke beneath the 50-day simple moving average on the back of the intervention episode involving the Ministry of Finance and US Treasury Department to support the yen, which weakened the dollar across the board.
Since then, DXY has been range-bound between 100 overhead and support around 99.50. However, following Friday’s disappointing US retail sales report, the index has broken the broader uptrend that had been in place from the low set in January this year.
While it still holds above 99.50, the price action looks heavy, suggesting near-term directional risk may be skewed to the downside. The oscillators are on board with that view, with RSI (14) sitting beneath the neutral 50 level at 37, while MACD remains in negative territory after staging a bearish crossover in late July.
Momentum is not accelerating to the downside yet, but it does favour selling into strength rather than buying dips.
A break beneath 99.50 would bring the important 200-day moving average into play, followed by 98.75, the swing low set in late May. A break beneath the latter would open the door to a far more extended move lower, with very little technical support evident until 97.65, where DXY found support on multiple occasions in April and May.
Overhead, 100 has been capping the price recently. If, for whatever reason, DXY were to break and close above there, it may re-embolden bulls to look for a push back towards 100.50, which has acted as support and resistance over periods this year.
Data Divergence Favours the Euro
If that downside risk in DXY does materialise, the euro is an obvious place to look given it carries the largest weighting in the US dollar index. So far, however, EUR/USD has yet to fully capitalise on the dollar doldrums.
That’s despite a very evident shift in relative economic data prints over recent weeks. While US surprises have been rolling over following a string of undershoots, largely the opposite has been occurring in the Eurozone, defying some of the gloomy expectations seen earlier this year, and despite ongoing geopolitical tensions in the Gulf impacting energy security.
Underlining that point, the graphic below tracks the spread between Eurozone and US economic surprises, according to Citi’s Economic Surprise Indices. At +55.5 points, the advantage in favour of the Eurozone is now the widest since February 2023, sitting in the 82.6th percentile of the entire series dating back to 2003.
Source: LSEG, FOREX.com
The level of that spread has also shown a strong positive relationship with the level of EUR/USD recently. Over roughly the past month, the correlation has been around +0.8 to +0.9, suggesting that as the Eurozone’s relative data advantage has widened, EUR/USD has generally traded at higher levels.
However, that relationship is far weaker when looking at day-to-day changes, so it is the level of the spread rather than daily movements that has been more informative recently.
Quiet Week Puts Focus on Price
With the data flow firmly favouring the Euro area at present, a very quiet week ahead in both the United States and Europe may make it difficult for that narrative to be challenged.
We get flash PMIs towards the back end of the week, which may be influential, along with the minutes of the July FOMC meeting. Outside of that, though, there is not a lot of major economic data. The final read of the Euro area July CPI report is unlikely to move the dial without a meaningful revision.
That makes it difficult for the calendar to dispute the current narrative: Euro area economic surprises are well and truly outrunning those in the United States, where the flow of positive data surprises continues to dwindle.
EUR/USD Eyes a Breakout
Source: TradingView
As you would expect given its dominant weighting in the DXY, the technical picture for EUR/USD looks almost the mirror opposite of the DXY chart. The pair broke sharply higher following the Fed meeting and intervention episode to support the yen, reclaiming the 50-day simple moving average before eventually breaking downtrend resistance that had been in place from the high set in January this year.
It has since been consolidating in a narrow range between the 23.6% Fibonacci retracement of the January to June bear move on the downside and 1.1577 on the upside, which has acted as both support and resistance over periods in recent months. The 100-day moving average is also running through the same area, with EUR/USD managing a marginal close above it on Friday for the first time since the middle of May.
Despite a couple of failures above 1.1577 over the past week, the pair finds itself knocking on the door of that level again in early Asian trade on Monday. With the oscillators starting to perk up again, upside momentum may be starting to build. RSI (14) has rebounded further away from the neutral 50 level to 63, while MACD is providing a complementary message, flipping positive after staging a bullish crossover at the start of July.
If the price were to push and close above 1.1577, holding above the 100-day moving average in the process, it would immediately put the 38.2% Fibonacci retracement of the January to June bear move and 200-day moving average into play overhead. A break of the latter may embolden more bulls to join the move.
On the downside, dips towards the 23.6% Fibonacci retracement continue to be bought, making that the immediate support zone underneath where the pair now trades. Beyond that, 1.1480 is a level that previously acted as resistance and may now flip to support, with the 50-day moving average located just underneath.
