EUR/USD extends recovery above 1.1040 as USD Index drops further, US NFP remains key

• EUR/USD has stretched its recovery above 1.1040 as the USD Index has resumed its downside journey.
• For a declining USD Index, US NFP seems to be the last hope.
• The ECB hiked interest rates by 25 bps but confirmed that more than one additional rate hikes are in the pipeline.

The EUR/USD pair has recovered firmly above 1.1040 in the Asian session as the US Dollar index (DXY) has resumed its downside journey. The major currency pair is trying to revive Thursday’s sell-off inspired by a smaller interest rate hike from the European Central Bank (ECB).

The USD Index has dropped further below 101.20 amid the absence of supportive economic indicators. Multiple headwinds are weighing pressure on the USD Index such as delay in raising US debt ceiling and mounting banking crisis. In addition to them, Federal Reserve’s (Fed) decision of being more data-dependent for further monetary policy action has dismantled the major support of the USD Index.

S&P500 futures have added significant gains in the Asian session as investors’ optimism is reviving from the US banking crisis. However, fears of delay in debt ceiling concerns could dent market sentiment dramatically. Members of the economic council of the White House have already declared that a delay in the raising of US debt ceiling could result in a default in payment obligations, which could cost millions of jobs and can have a significant effect on the economic output.

Coming to the US economic data, Nonfarm Payrolls (NFP) are the last hope for the USD index. A preliminary US NFP report (April) shows that the economy added 179K jobs in April, lower than former additions of 236K. The Unemployment Rate is expected to remain steady at 3.5%.

On the Eurozone front, ECB President Christine Lagarde hiked interest rates by 25 basis points (bps) on Thursday but made clear that more than one additional rate hikes are in the pipeline. It seems that declining credit disbursement by Eurozone banks due to higher interest rates and tight credit conditions allowed the ECB to go light on interest rates this time.

Meanwhile, investors are awaiting the release of the Eurozone Retail Sales (April) data. Monthly Retail Sales are expected to remain flat vs. a contraction of 0.8%. The annual retail demand is seen extending its contraction to 3.1% from the former contraction of 3.0%.