EUR/USD drops to fresh 5-year lows in the sub-1.0600 area

• EUR/USD extends the leg lower to the area below 1.0600.
• The greenback trades in cycle peaks, US yields regain composure.
• Germany GfK Consumer Confidence deteriorated in May.

Sellers remain well in control of the sentiment around the single currency and drag EUR/USD to the 1.0590/85 band, or new 5-year lows, on Wednesday.

EUR/USD weaker on USD-strength, geopolitics

EUR/USD loses ground for the fifth session in a row midweek amidst the continuation of the strong march north in the dollar and persistent geopolitical concerns, particularly around the potential EU embargo on Russian oil.

In the German debt markets, the 10y bund yields hover around 0.80% amidst the renewed multi-session weakness, whereas US yields regain some upside traction following the recent corrective leg.

In the domestic calendar, Germany Consumer Confidence tracked by GfK worsened to -26.5 for the month of May. Later on Wednesday, ECB’s Lagarde is also due to speak.

In the US docket, weekly Mortgage Applications come in the first turn seconded by Trade Balance figures and Pending Home Sales.

What to look for around EUR

EUR/USD’s price action shows further deterioration and revisits the sub-1.0600 area for the first time since April 2017. The outlook for the pair still remains tilted towards the bearish side, 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 around June/July, 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: Germany GfK Consumer Confidence (Wednesday) – ECB 2021 Annual Report, Consumer Confidence, Economic Sentiment, Germany Flash Inflation Rate (Thursday) – Germany, EMU Flash Q1 GDP Growth Rate, EMU Flash Inflation Rate (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. Second round of the presidential elections in France (April 24). Impact on the region’s economic growth prospects of the war in Ukraine.

EUR/USD levels to watch

So far, spot is down 0.21% at 1.0614 and a break below 1.0587 (2022 low April 27) would target 1.0569 (low April 10 2017) en route to 1.0493 (low February 2017). On the upside, the next hurdle appears at 1.0936 (weekly high April 21) seconded by 1.1000 (round level) and finally 1.1022 (55-day SMA).