EUR/USD sinks to 5-year lows in the 1.0420 region, risk aversion resurfaces

Sellers regained control over the single currency and dragged EUR/USD to fresh cycle lows in the 1.0420 region on Thursday, an area last visited back in January 2017.

EUR/USD weak on USD-buying, risk-off

The resurgence of geopolitical-led risk aversion lent unexpected legs to the greenback and the rest of the safe haven universe in the second half of the week and forced EUR/USD to break below the multi-session consolidative theme to print fresh lows in the 1.0420 zone.

In addition, the moderate demand for bonds motivated the German 10y Bund yields to shed ground for the third session in a row and return to the sub-0.90% region so far on Thursday.

No reaction in the exchange rate after ECB’s Board member Kazimir joined the July-rate-hike bandwagon earlier in the session, falling in line with his colleagues’ comments so far this week.

The domestic calendar is muted on Thursday, although Producer Prices and the usual Initial Claims will take centre stage across the Atlantic.

What to look for around EUR

EUR/USD loses the grip and revisits the 1.0420 region for the first time since January 2017. The outlook for the pair remains well entrenched in the negative camp, always in response to dollar dynamics, geopolitical concerns and the Fed-ECB divergence. Occasional pockets of strength in the single currency, in the meantime, should appear reinforced by speculation the ECB could raise rates at some point in the summer, while higher German yields, elevated inflation and a decent pace of the economic recovery in the region are also supportive of an improvement in the mood around the euro.

Key events in the euro area this week: EMU Industrial Production (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Impact on the region’s economic growth prospects from the war in Ukraine.

EUR/USD levels to watch

So far, spot is losing 0.84% at 1.0424 and a break below 1.0422 (2022 low May 12) would target 1.0400 (round level) en route to 1.0340 (2017 low January 3 2017). On the flip side, the next up barrier aligns at 1.0641 (weekly high May 5) followed by 1.0936 (weekly high April 21) and finally 1.1000 (round level).