EUR/USD displays a V-shape recovery to near 1.0700 as USD Index faces a sell-off

• EUR/USD has demonstrated a V-shape recovery post a sell-off in the USD Index.
• Eurozone’s economic turmoil is attracting downgrades from credit rating agencies.
• ECB Schnabel cited the impact of our tighter monetary policy on inflation is expected to peak in 2024.

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 sheer sell-off in the US Dollar Index (DXY). The upside in the USD Index seems capped as investors are not confident about one more interest rate hike announcement from the Federal Reserve (Fed).

S&P500 futures are holding nominal losses in London. US equities witnessed decent buying interest on Tuesday. It seems that investors are turning cautious, however, the overall market mood is cheerful.

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% chances are in favor of a pause announcement by the Fed for June policy.

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.

About inflation guidance, 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.