EUR/USD drops further below 1.0850 as USD Index recovers firmly, Eurozone GDP eyed

• EUR/USD has extended its downside below 1.0850 as the risk-off impulse has strengthened.
• Following the footprints of the German GDP, Eurozone GDP could display a contraction too.
• The street is expecting a 25 bps interest rate hike from the Fed and a 50 bps rate hike from the ECB.

The EUR/USD pair has extended its downside move below 1.0850 after an intensive selling action by the market participants around 1.0860. The pullback move displayed by the shared currency pair met with significant offers as the US Dollar Index (DXY) has shown a stellar recovery after correcting to near 101.80.

Gains recorded by the S&P500 futures have disappeared as investors have underpinned the risk-aversion theme ahead of the interest rate decision by the Federal Reserve (Fed). Investors are worried that further interest rate hike announcements by Fed chair Jerome Powell will accelerate recession fears significantly.

The USD Index is recovered dramatically as a 25 basis point (bps) interest rate hike is widely expected by the street. The roadmap of achieving price stability is far from over as the current inflation rate in the United States is three times more than the desired rate of 2%. Therefore, the Fed cannot pause hiking interest rates at this point in time.

Apart from the policy decision, investors will keenly focus on the interest rate guidance. Analysts at Rabobank cited “We continue to think that based on the fading momentum of inflation, the Federal Open Market Committee (FOMC) is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year.”

On the Eurozone front, investors are also awaiting the interest rate decision by the European Central Bank (ECB). Rising labor cost and an inflation rate above 9% is still a concern for ECB President Christine Lagarde. As per the consensus, ECB President will announce an interest rate hike of 50 bps to 2.50%.

But before that, preliminary Eurozone Gross Domestic Product (GDP) (Q4) data will remain in focus. The economic data is seen at 0% vs. the prior release of 0.3% on a quarterly basis. While the annual GDP might contract to 1.8% from 2.3% reported earlier. Investors should be prepared for a contraction in Eurozone GDP as the German economy reported a contraction of 0.2% on Monday against a flat reading as expected.