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- A combination of factors dragged EUR/USD to a fresh five-year low on Thursday.
- Concerns about the economic fallout from the Ukraine crisis weighed on the euro.
- Aggressive Fed rate hike bets continued boosting the USD and contributed to the fall.
The EUR/USD pair continued losing ground for the sixth successive day and dropped to its lowest level since March 2017, around the 1.0500 psychological mark during the Asian session on Thursday. The shared currency was weighed down by concerns that the European economy, which relies heavily on Russia to meet its energy needs, will suffer the most from the Ukraine crisis. The worries resurfaced after Russia announced a plan to halt gas flows to Poland and Bulgaria amid a standoff over fuel payments from “unfriendly” buyers in rubles. It is worth mentioning that the EU gets about 40% of its gas and 30% of its oil from Russia and has no easy substitutes if supplies are disrupted.
The risk of an energy crisis could make it difficult for the European Central Bank to tighten its monetary policy, leaving it lagging far behind the Fed. The US central bank is widely expected to hike interest rates by 50 bps when it meets on May 3-4, and again in June and July, and ultimately lift rates to around 3.0% by the end of the year. The bets were reaffirmed by the recent hawkish comments by influential FOMC members, including Fed Chair Jerome Powell, last week. Apart from this, the deteriorating global economic outlook boosted the US dollar's reserve currency status and pushed it to the highest level since March 2020, which exerted additional pressure on the pair.
The prospects for rapid interest rate hikes in the US, the prolonged Russia-Ukraine conflict and the latest COVID-19 outbreak in China have been fueling fears about stalling global growth. That said, signs of stability in the equity markets could act as a headwind for the safe-haven buck and extend some support to the pair amid extremely oversold conditions. The fundamental backdrop, however, remains tilted firmly in favour of bearish traders and suggests that the path of least resistance for the pair is to the downside. Market participants now look forward to the release of the prelim German consumer inflation figures for some impetus ahead of the key US macro data.
The US economic docket highlights the release of the Advance Q1 GDP report and the usual Weekly Initial Jobless Claims. The data could influence Fed rate hike expectations and drive the USD demand. This, along with fresh developments surrounding the Russia-Ukraine saga, should allow traders to grab some short-term opportunities around the pair.
Technical outlook
From a technical perspective, acceptance below the 1.0500 round figure would mark a fresh bearish breakdown and make the pair vulnerable. The subsequent downfall has the potential to drag spot prices towards intermediate support near the 1.0450 area en route to the 1.0400 mark and 2017 low, around the 1.0340 region. That said, RSI (14) on daily/weekly charts is already flashing extremely oversold conditions and warrants some caution for aggressive bearish traders. This makes it prudent to wait for some near-term consolidation or modest recovery before positioning for the next leg down.
On the flip side, the 1.0550 area now seems to act as an immediate resistance, above which a bout of short-covering could lift the pair back towards the 1.0600 mark. The recovery momentum could further get extended, though it runs the risk of fizzling out rather quickly near the 1.0640-1.0650 area. The latter should act as a pivotal point for short-term traders, which, if cleared, will suggest that the pair has formed a near-term bottom and pave the way for additional gains.
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