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EUR/USD bears refuelling from a 50% mean reversion, eye US GDP

  • EUR/USD bulls are mauled by the bears and there could be more to go to the downside. 
  • The focus is on the US GDP for the day ahead.

At 1.0552, EUR/USD is around flat in the Tokyo open as the price consolidates below 50% mean reversion of the prior session sell-off. The pair, however, remains in the hands of the bears amid the Ukraine crisis and risk-off markets that favour the US dollar.

The greenback was a lot stronger versus its major trading partners mid-week as traders await the advance Gross Domestic Product reading for Q1 that will be released today along with weekly initial jobless claims, followed by Personal Income and Spending, the Michigan Sentiment Index on Friday and the Federal Reserve next week. 

While Fed members remain in a quiet period before the May 3-4 Federal Open Market Committee meeting, the focus has turned towards the Chinese covid lockdowns and the Ukraine crisis with risks to eurozone economic growth.

Russia cut off gas supplies to parts of the region. Russia's Gazprom (GAZP) halted gas supplies to Poland and Bulgaria on Wednesday over their failure to pay in roubles, cranking up an economic war with Europe in response to Western sanctions imposed for Moscow's invasion of Ukraine.

Meanwhile, as China enacts lockdowns in a bid to stem the spread of COVID-19, Beijing has ramped up mass testing for COVID-19 and the combination of expectations of 50 basis points at the Fed's May 3-4 meeting is weighing in the single currency. WIRP suggests 50 bp hikes at the May 3-4 and June 14-15 meetings are fully priced in, with nearly 25% odds of a possible 75 bp move in June. 

US dollar on fire

The dollar index against a basket of currencies (DXY) reached 103.282, the highest since Jan. 2017. ''We continue to target the March 2020 high near 103 but have gotten here much sooner than we expected,'' analysts at Brown Brothers Harriman said. 

''As such, we have to start looking ahead as we think the strong dollar trend will remain in play through Q2 and into Q3.  After 103, there's the December 2016 high near 103.65 but that's really not that far off either.  After that, there really aren't any significant chart points until we get to the September 2002 high near 109.24.''

''This seems to be a bridge too far. Yes, we are dollar bulls but we don't think it can rally another 6-7% from current levels. Perhaps we can get up to 105 before topping out but that's really just a guess at this point, pure and simple.''

In contrast to the Fed and expectations in the markets, the European Central Bank's tightening path is a bit behind. Some ECB officials are calling for the next rate increase in July. Traders, in this respect, will be looking to EU inflation data that will be released on Friday.

EUR/USD technical analysis

From an hourly perspective, there is the potential for a downward continuation as per the correction meeting the 50% mean reversion mark, a bearish engulfing and drift to the downside again:

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Ross J Burland

Ross J Burland, born in England, UK, is a sportsman at heart. He played Rugby and Judo for his county, Kent and the South East of England Rugby team.

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