EUR/USD: dollar strength has a data problem

EUR/USD has fallen roughly two cents from its August high after a run of firmer US data and a Federal Reserve that has stopped talking about further cuts. The pair is now sitting on the 1.0800 area that held in June.

Markets price about 38 percent odds of a Fed cut in December, down from near certainty a month ago. The European Central Bank is expected to hold for the rest of the year. That leaves the rate differential stable and the dollar's advantage resting on growth, which is where the risk lies: US employment data has softened for three consecutive months, and yesterday's CPI beat was driven by shelter, a lagging component. Positioning data shows speculative dollar longs at their largest since spring, which increases the reaction to any soft US number.

The daily trend is down from the August high, with the 50-day average now above price and turning lower. Support at 1.0800 has been tested twice this week without a daily close below it. A close beneath it opens 1.0720, the spring low. Resistance is at 1.0900, then the 50-day average near 1.0950. The pullback rally from 1.0800 has so far been shallow, which favours the sellers.

A daily close above 1.0950 would suggest the dollar rally has ended. A US retail sales miss on Monday combined with a weak regional manufacturing survey would be the likely catalyst.

US retail sales, Monday 12:30 UTC. FOMC decision, Wednesday 18:00 UTC. Eurozone flash PMIs, the following Tuesday.