EUR/USD returns above 1.05, cancels short-term downtrend

The USD eased broadly as investors booked profits from its recent rally, sending the EURUSD pair 1% higher on Tuesday, jumping above the critical 1.05 level.

EU data help the EUR

European Central Bank (ECB) Governing Council member Klaas Knot told the Dutch TV on Tuesday that a 50 basis points rate hike should not be excluded if data in the next few months suggest that inflation is broadening and accumulating.

"The ECB has to normalize policy," Knot said, adding that a 25-basis-point rate rise in July is reasonable.

The seasonally adjusted Gross Domestic Product expanded at an annualized rate of 5.1% in the first quarter, according to Eurostat statistics released on Tuesday, compared to a market consensus of 5%.

The report went on to say that GDP climbed by 0.3% quarterly. Finally, as projected, the Employment Change increased by 0.5% in the first quarter.

In other news, retail sales in the United States increased at a robust rate in April, indicating that the economy is still strong, with consumer spending holding up despite stubbornly rising inflation.

According to the Commerce Department, retail sales in the United States gained 0.9 percent in April, boosted by higher sales of autos, gadgets, and dining out. According to Bloomberg consensus figures, economists expected a 1.0 percent increase.

Investors will have more Fedspeak to digest in the coming days. Fed Chairman Jerome Powell is scheduled to speak at a Wall Street Journal conference on Tuesday afternoon, and other central bank officials are set to appear through Friday.

Bearish trap?

It looks like the recent drop to new cycle lows below 1.05 could have been a bearish trap, as stop-losses of long positions have been destroyed. If the euro closes above 1.05 today, we might see further gains as the reversal pattern would be confirmed.

In that scenario, the next target could be near 1.06, where the euro has failed previously.

Alternatively, a failure to remain above 1.05 could lead to a renewed selling pressure, likely sending the pair to its current lows at 1.04.