EUR/USD Bears Refuel Following a 50% Mean Reversion, With an Eye on US GDP

EUR/USD is trading near flat at 1.0552 at the Tokyo open, as the price consolidates below the 50% mean reversion of the previous session's sell-off. The pair, however, remains in the bears' hands as a result of the Ukraine crisis and risk-off markets favoring the US dollar.

The dollar was significantly stronger against its major trading partners during the middle of the week as traders awaited 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, and the Federal Reserve the following week.

While Fed members remain silent ahead of the Federal Open Market Committee meeting on May 3-4, the spotlight has shifted to China's covid lockdowns and the Ukraine crisis, both of which pose risks to European economic growth.

Russia cut off supplies of natural gas to portions of the region. On Wednesday, Russia's Gazprom (GAZP) cut off gas supplies to Poland and Bulgaria for failing to pay in roubles, intensifying an economic battle with Europe in reaction to Western sanctions imposed in response to Moscow's invasion of Ukraine.

Meanwhile, as China implements lockdowns in an attempt to contain the spread of COVID-19, Beijing has increased mass testing for the virus, and the combination of expectations for a 50 basis point hike at the Federal Reserve's May 3-4 meeting is dragging on the euro. WIRP indicates that 50 basis point increases at the May 3-4 and June 14-15 meetings are completely priced in, with over 25% probability of a possible 75 basis point increase in June.

The United States Dollar is on Fire

The dollar index against a basket of currencies (DXY) hit a record high of 103.282 in January. "We remain on track for a March 2020 peak near 103, but have arrived significantly sooner than predicted," Brown Brothers Harriman analysts said.

"Since such, we must begin thinking ahead, as we believe the strong dollar trend will continue into Q2 and possibly into Q3. Following 103, there is the December 2016 high near 103.65, which is also not that far off. Following that, there are no meaningful chart points until we reach the September 2002 peak of 109.24."

"This appears to be a step too far. Yes, we are bullish on the dollar, but we believe it cannot rally another 6-7 percent from current levels. Perhaps we can reach 105 before topping out, but that is purely a guess at this point."

In comparison to the Federal Reserve and market forecasts, the European Central Bank's tightening program is slightly behind schedule. Several ECB officials have called for the next rate hike to take place in July. Traders will be monitoring the European Union's inflation statistics, which will be issued on Friday, in this regard.

Technical Analysis of the EUR/USD

On an hourly basis, there is the possibility of a downward continuation as the correction approaches the 50% mean reversion level, a bearish engulfing, and another negative drift: