The US economy, which had shown remarkable resilience for much of this year, has recently seen a string of economic data fall short of market expectations. This unusual shift has directly applied downside pressure on the US dollar. In contrast, economic indicators across the Eurozone have been steadily improving, creating a clear divergence in economic fundamentals between the two regions. This has led the market to reassess the upside potential for the euro against the dollar.
With a scarcity of major economic data releases this week, it is difficult for the macro narrative to be quickly overturned. Currency movements will be increasingly driven by technical charts, placing key technical levels for both currencies under significant scrutiny.
US Economic Data Weakens Collectively, Dragging Down the Dollar Index
US retail sales data for July, released on the evening of Friday, August 14th, significantly missed expectations, falling by 0.6% month-over-month and ending a nine-month streak of growth. The control group retail sales, which directly factor into GDP calculations, also recorded a 0.4% month-over-month decline, with prior historical data being revised downward simultaneously. Prior to this, US CPI and PPI inflation data had already shown signs of weakness. Combined with the unexpected weakening of July's non-farm payrolls data, the market is now re-evaluating whether the US economic advantage that had been supporting the dollar's strength is fading.
From a quantitative perspective, the Citi US Economic Surprise Index shows a high positive correlation with the US Dollar Index (DXY), with a correlation coefficient of 0.85 over the past 20 trading days. This high correlation confirms that unexpected changes in economic data have become a core variable influencing the dollar's trajectory. While correlation does not imply causation, the persistent weakness in data has undeniably weighed on the Dollar Index's performance. On the technical front, the Dollar Index briefly approached its 2026 high at the end of July but subsequently broke below its 50-day moving average following the yen intervention event, ending its previous short-term uptrend. After the release of the retail sales data last Friday, the Dollar Index further broke below its medium-to-long-term uptrend channel that began from the January low. The overall chart pattern appears weak, with the 99.50 support level temporarily lost. The RSI indicator has fallen to 37, and the MACD remains negative, suggesting short-term downside risks are dominant. The next key support levels are seen at the 200-day moving average and 98.75. An effective break below 98.75 could open the door for further downside in the Dollar Index. On the upside, the 100.00 level forms a clear resistance; only a firm hold above this level would allow bulls to regain upward momentum.
Divergence Between US and European Economies Intensifies, Euro Awaits Breakout
As the US economic surprise fades, Eurozone economic data continues to deliver positive surprises. The Citi Economic Surprise Index differential shows that the Eurozone's data advantage over the US has expanded to +55.5 points, the largest margin since February 2023. Over the past month, the correlation between this data differential and the euro-dollar exchange rate has remained between 0.8 and 0.9, indicating that a widening relative economic advantage for the Eurozone often leads to a stronger euro. This week features limited significant data from both the US and Eurozone markets, with only the preliminary PMI readings later in the week and the July FOMC meeting minutes holding some influence. The Eurozone's final July CPI is unlikely to stir the market without a major revision. The prevailing narrative of a "strong Eurozone economy, weakening US economy" is hard to overturn quickly.
On the technical charts, the euro-dollar pair's movement is nearly a mirror image of the Dollar Index. Following the Fed's policy decision and the yen intervention, the pair broke higher, crossing above its 50-day moving average and breaking the downtrend that began from the January high. The price has now broken above the 1.1577 resistance level and closed slightly above the 100-day moving average last Friday. The RSI indicator has risen to 63, and the MACD has formed a bullish crossover, remaining positive, indicating that bullish momentum is building. If the pair can hold firmly above 1.1577, it will next challenge key resistance levels like the 200-day moving average. On any pullback, buying support is expected at the 23.6% Fibonacci retracement level, with 1.1480 acting as the next support level.
Conclusion
Overall, the relative strength of the US and European economic fundamentals has shifted. The US dollar is under pressure from weak data and its technical picture has deteriorated, while the euro is seeing improvements in both its fundamental and technical outlooks. In an environment with a scarcity of major data releases, technical signals on the charts will be the primary guide for short-term exchange rate direction. The 1.1577 level has become a critical threshold for the euro-dollar pair in determining whether it can embark on a new upward cycle.