Downside EURUSD Correction Stalls but US Retail Sales Data Points to Dollar Strength

The US stock market closed in the green on Monday, helping to stabilize sentiment on Tuesday. The decision regarding the rebalancing of the Nasdaq index had no unexpected consequences, which itself served as a positive signal for the market. Negative concerns arising from the Chinese data (GDP below forecasts) were mitigated by the manufacturing sector activity index from the Federal Reserve Bank of New York, which showed a smaller decline in July than expected. The dollar index attempted to rise yesterday but faced resistance at the level of 100.15. Afterward, it abandoned all attempts to stage a comeback and returned to the lows of the previous Friday.Following last week's US CPI miss, markets expect the slack to linger in the data, as the downward impulse will likely trigger deterioration in other macro indicators. Today's retail sales report presented a mixed picture: the headline indicator grew by 0.2% for the month, missing the 0.5% forecast. However, core retail sales, which exclude fuel and automobile sales, increased by 0.3% for the month, surpassing the 0% forecast. Additionally, figures for the previous month were revised upward:Core retail sales are more preferred for determining trends in consumer spending, as they exclude the influence of seasonal, short-term, and random demand fluctuations, which tend to distort the overall picture. With core retail sales on the rise, the dollar, overall, disregarded the weak headline indicator. Greenback recovered intraday losses following the release and Treasury bond yields rose by 2-3 basis points. It is evident that after the inflation surprise, it will be very challenging to maintain the expectation of two interest rate hikes by the Federal Reserve this year. Therefore, the markets currently approach hawkish surprises in the data with caution.The US inflation data for June caused officials from other central banks to doubt their hawkish forecasts, as it is clear that the downward price momentum in the US will affect other economies as well. ECB official Klaas Knot emphasized yesterday that rate hikes after July are uncertain, laying the groundwork for speculation that the ECB will also try not to tighten too aggressively and will aim to announce a pause after July. All of this suggests that the path for EURUSD to the upside will not be easy, and a serious dovish signal from the Federal Reserve at the July meeting, amid continuing prospects of global economic expansion, will encourage the search for yield outside the US and, consequently, put pressure on the dollar. Otherwise, the dollar will most likely find catalysts for a rebound.In the short-term perspective, the idea of a rebound in EURUSD from the level of 1.125 and a correction to 1.11-1.1150 remains appealing: