Dollar Weakness Paves Way for Euro Breakout

The US dollar's exceptionalism is showing signs of fading as softer retail sales, inflation, and employment data weigh on its value. In contrast, stronger Euro area data and a widening economic surprise gap are raising the prospect of a EUR/USD breakout.

US retail sales fell 0.6% in July, significantly undershooting expectations for a 0.1% increase and marking the first decline in nine months. This weak report followed soft CPI and PPI readings earlier in the week, along with a surprise decline in non-farm payrolls for July.

The run of softer-than-expected economic prints is weighing on the narrow US dollar index (DXY), which has broken beneath its 50-day simple moving average. The correlation between Citi's US Economic Surprise Index and DXY suggests that the flow of US economic data has been an influential factor in the dollar's overall performance.

The Euro, meanwhile, is poised to capitalize on the dollar's weakness, with a widening gap in relative economic data surprises favoring the Eurozone. The spread between Eurozone and US economic surprises has reached +55.5 points, its widest since February 2023. A break above EUR/USD's resistance level of 1.1577 could put the pair on track to reach higher levels.