EUR/USD drops below 1.0400 on sour sentiment, Eurozone economic forecasts eyed

• EUR/USD reverses Friday’s corrective pullback from five-year low.
• Risk-aversion returns to table after China reports downbeat economics, renews covid fears.
• Mixed Fedspeak, softer US data fail test USD bulls of late.
• Eurozone’s quarterly economic forecasts become interesting amid Russia-Ukraine crisis, ECB’s July rate hike concerns.

EUR/USD fails to extend the previous day’s recovery from a five-year high, taking offers to refresh the intraday low around 1.0390 during early Monday morning in Europe.

The major currency pair took a U-turn from a muti-year low the previous day as the US Dollar Index (DXY) consolidated gains around a 20-year high, backed by downbeat US data and Fedspeak. However, the recent risk-aversion wave renews USD buying and weighs on the EUR/USD prices ahead of the quarterly economic forecasts from the European Commission.

Market sentiment sours after China reported downbeat figures for April month’s Retail Sales and Industrial Production, backed by conveying fresh fears over the coronavirus resurgence. That said, Shanghai City Official’s comments and weekend updates from Beijing were the major catalysts to renewing COVID-19 fears. While Shanghai City Official initially mentioned that the city's epidemic is under control, he also stated, “However the risks of rebound remain and we need to continue to stick to controls,” which in turn drowned the market’s risk appetite. On the same line was the weekend news suggesting Beijing’s guidelines to work from home for four districts, including the heavyweight Chaoyang.

Additionally challenging the previous risk-on were fears that Germany isn’t going to respect Hungary’s push for no total ban on Russia’s energy imports. Furthermore, news that the military actions in Donbas continue to accelerate underpin the risk-off mood, as well as favor the US dollar’s safe-haven demand.

Amid these plays, the S&P 500 Futures drop 0.80% even after the Wall Street benchmarks rallied the previous day. Further, the US 10-year Treasury yields struggle to extend Friday’s recovery moves as the bond coupon declines 3.6 basis points (bps) to around 2.95% by the press time.

Moving on, the Eurozone economic forecasts will be crucial amid looming fears of recession and chatters surrounding the European Central Bank’s (ECB) rate hike in July. Should the EC projections fail to comply with the market’s downbeat forecasts, the EUR/USD may have a reason to pare the latest losses, amid a lack of major directives from the US.

"Brussels is set to cut its growth forecasts further and lift its inflation outlook as the energy crisis triggered by Russia’s invasion of Ukraine exacts its toll on the EU economy," said Financial Times (FT) ahead of the release.

Read: EUR/USD Weekly Forecast: How far can the dollar go?

Technical analysis

Failures to approach a three-week-old resistance line, near 1.0500, direct EUR/USD prices towards the south. Also acting as the key hurdle is the monthly peak of 1.0641.

Meanwhile, the 1.0350-40 support zone, comprising the recent low and the year 2017 bottom, puts a strong floor under the EUR/USD prices.