Euro hanging around 1.07

The EUR/USD pair has shown a V-shape recovery move after finding a cushion at 1.0670 in the European session. The major currency pair has rebounded above 1.0700 amid a big sell-off in the US Dollar Index. The upside in the USD Index seems capped as investors are not certain about the US Federal Reserve’s next move regarding interest rates.

Considering the strength in the downside move shown by the US Dollar Index (DXY), the 104.00 support could be broken. As per the CME Fedwatch tool, more than 73 percent of market participants are in favour of a pause in interest rate hikes by the Fed for the month of June.

The reason behind the higher odds for an unchanged interest rate policy is the poor economic prospects of the United States economy. US factory activity has registered seven straight monthly contractions and the service sector is managing to defend the contraction phase with lots of difficulties. Therefore, expectations of a bleak economic outlook could be dried by pausing the policy-tightening spell for a while.

In the Eurozone, economic turmoil is attracting downgrades from credit rating agencies. The largest economy of Eurozone- Germany is going through a recession amid contracting Gross Domestic Product (GDP) figures for the last two quarterly amid poor factory activity. A situation of weak activities in times of high inflation is painting a rosy picture for the shared continent.

Inflation predictions in the Euro zone vary and European Central Bank (ECB) Governing Council member Isabelle Schnabel said, “The impact of our tighter monetary policy on inflation is expected to peak in 2024.” In the meantime, more interest rate hikes are expected from ECB President Christine Lagarde.