Advance Retail Sales (MAY) (12:30 GMT; 08:30 EST)
Expected: 0.7%
Previous: -0.2%

Federal Reserve’s Beige Book (18:00 GMT; 14:00 EST)

How Will The Markets React?

Given the hawkish statements we’ve seen from Federal Reserve policy makers lately, it’s not surprising that US markets have been looking towards policy tightening. Prices on US Treasury Notes have plunged over the past month, the US dollar has shown a brisk rally against the Euro over the past week, and the S&P 500 has declined during 4 of the past 6 trading sessions. The release of Advance Retail Sales may only add to this sentiment, as the figure is anticipated to surge 0.7 percent during May after contracting 0.2 percent the month prior, signaling that the US consumer is just as resilient as ever and that the soft April reports were just a one-off event. There is some downside risk given the sharp rise in gasoline prices, but second and third-tier reports indicate otherwise. The ICSC-UBS indicator showed a 2.5 percent jump in sales by chain stores, while SpendingPulse reported a 0.3 percent pick up – ironically, led by a rise in gasoline prices – while the “core” reading showed a comparable gain of 0.2 percent. However, if we see a softer-than-expected Advance Retail Sales result, US markets may not be prepared to brush off hawkish expectations for the Fed ahead of the release of CPI on Friday. Furthermore, added event risk on Wednesday comes from the Fed’s Beige Book Report, which will serve as a preview for commentary from the FOMC’s next meeting on June 28th. The report will likely reflect health in the manufacturing sector in line with the ISM survey, softness in housing construction, and inflation at “uncomfortably” high levels – all of which should keep the Fed’s stance relatively unchanged, barring a sharp pick up in CPI this week.

Bonds – US 10-Year Treasury Note Futures

US Treasury Note prices have taken a sharp dive lower, hitting last Friday’s low of 104.04 but ending the day a nudge higher at 104.05. Government bonds around the world have been subject to similar price action given hawkish expectations for several central banks, but commentary by multiple FOMC members regarding their discomfort with current inflation levels has certainly not helped the case for Treasuries. Wednesday holds significant event risk with both Advance Retail Sales and the Fed’s Beige Book due to be released. Will this fragile level of support be able to prevent another steep decline? If both releases significantly underpin the case for an increasingly hawkish bias by the Fed, it is unlikely, especially as the next level of support lies at the pivot low of 103.26.

FX – EUR/USD

EUR/USD has already broken through not only trendline support, but also the 100 day SMA. While the 1.3300 level should manage to hold further losses for the pair back briefly, EUR/USD may not stand a chance on Wednesday as Advance Retail Sales are anticipated to rebound while the Fed’s Beige Book could reflect a fairly rosy view of the economy – with the exception of housing construction.

Given the fact that the US dollar has been riding the wave of hawkish commentary by multiple FOMC members, even results that miss expectations could propel further gains. The next layer of support for EUR/USD lies near the confluence of an ascending trendline, the 61.8% fib of 1.2866 - 1.3684 at 1.3180 and the 200 day SMA at 1.3110. However, if we see no change or contraction in the Retail Sales report, the bearish data could buoy EUR/USD. Nevertheless, technical factors favor a decline towards trendline support, and fundamental data appears to be lining up just right to perpetuate the move.

Equities – S&P 500 Index

US stocks fell after the bear market in bonds pushed yields to a five-year high and increased concern that the pace of takeovers may have peaked along with corporate profits. Meanwhile, all 14 real-estate companies in the S&P 500 and every homebuilder retreated on speculation that high interest rates will maintain slower economic growth, with the S&P closing out the day down 1.1 percent at 1,493.00. Financial shares exerted a large drag on the S&P 500 as well, falling 1.1 percent as a group. Citigroup Inc., the world's biggest financial firm, fell 87 cents to $52.60 while Bank of America Corp., the second biggest US bank, slipped 39 cents to $49.66.

Looking ahead to Wednesday, US equities could be in danger once again as both Advance Retail Sales and the Fed’s Beige Book are due to be released. With the prevailing concerns of the markets remaining that the Federal Reserve will remain hawkish, economic reports that underpin this sentiment will only be exacerbated. However, the S&P 500 has had trouble breaking down below 1,490, where a series of lows and the 50 day SMA have formed support. As a result, losses for the index could be limited, but if the data leads equities to weigh heavily enough on the level, US shares in general could see very steep losses.

Terri Belkas is a Currency Analyst for FXCM.