EUR/USD Forecast: Down but not out, bulls well-positioned to rally on retail sales

• EUR/USD has been retreating from the highs as the dollar rises with yields, upbeat data.
• The US consumer is left, right, and center as the week draws to an end.
• Friday's four-hour chart is painting a bullish picture. 

Time for the pendulum to swing higher again? The US dollar has found its reasons to rise, but that may prove short-lived. 

US bond auctions have been playing an outsized role in the greenback's movements this week. After the successful massive ten-year auction, yields dropped and the dollar followed them lower, the 30-year bond auction did not go so well. Investors were unwilling to accept low returns, and the consequent jump in yields sent the greenback higher. 

Returns on US debt rose also amid falling hopes for a large fiscal package. Republicans and Democrats remain far apart and are hardly talking to each other. One of the points of contention is funding for the US Post Office in face of a potential influx of mail-in ballots. The opposition wants more funds but President Donald Trump – who voted by mail several times – rejects these calls.

The longer the spat continues, the higher the spending needed down the road as the economy struggles. 

A better reason for the world's reserve currency to rise is the encouraging drop in initial jobless claims – under one million for the first time in 21 weeks. Continuing claims fell under 16 million, another positive development supporting the dollar. 

The resilience of America's economy will come to a fresh test on Friday with the all-important US retail sales report for July. After two months of sharp rebounds from April's crash, economists expect a slower increase. On the one hand, government support was in full gear lat month, yet coronavirus' resurgence remained weighed on expenditure. 

Are expectations too high or too low? An upside surprise could boost the dollar while a small miss could send it down.

See US Retail Sales July Preview: Expectations of moderation may be overstated

US COVID-19 cases have flattened at a high rate of 50,000 per day, while deaths have also stabilized above the 1,000/day mark. Cases are on the rise in the old continent as well, with Spain's daily case count touching 3,000, France reporting over 2,000 infections, and Germany consistently topping the 1,000/cases per day. 

Nevertheless, the situation is far worse in America:

Source: FT

The eurozone publishes an update on Gross Domestic Product for the second quarter, which is expected to confirm a squeeze of 12.1% and unlikely to move markets. 

Apart from US retail sales, the consumer remains in focus with the preliminary release of the University of Michigan's Consumer Sentiment Index for August. It is forecast to remain at low levels. 

See US Consumer Sentiment Preview: Looking ahead

Chinese and American negotiators will meet on Saturday to take stock of the trade agreement. While the world's largest economies have been clashing on a plethora of issues, both are intent on keeping the accord intact. Markets remain calm, but any jitters may boost the safe-haven dollar. 

All in all, it may be time for EUR/USD to rise, yet there are many moving parts in play.

EUR/USD Technical Analysis

Euro/dollar is trading above the 50, 100, and 100 Simple Moving Averages on the four-hour chart once again – and upside momentum is picking up. The Relative Strength Index is balanced, far from overbought conditions.

Bulls seem to have gained control. 

Resistance awaits at around 1.1865, which was the peak on Thursday. It is followed by the two-year high of 1.1915. The next target is 1.20.

Immediate support is at the daily low of 1.18, converging with the 50 SMA. It is followed by 1.1750, a support line from last week, and then by 1.17, a double-bottom. 

More It’s a faulty extrapolation to see falling claims as a recovery indicator