EUR/USD drops as likely rate hikes from ECB propel fears of longer recession in Germany

• EUR/USD is showing a vulnerable performance amid a recovery in the US Dollar Index.
• Chances of a restart of policy-tightening by the Fed have solidified considering resilience in US Durables data.
• Risks of a longer recession in the German economy have fueled as business morale has slipped consecutively for the second time.

The EUR/USD pair is displaying topsy-turvy moves around 1.0950 in the Asian session. The major currency pair is struggling to find direction as investors are awaiting the speech from Federal Reserve (Fed) chair Jerome Powell for further guidance on interest rates.

S&P500 futures are showing nominal losses in Asia. US equities remained in the grip of bulls on Tuesday as orders for United States Durable Goods remained better than projected. Upbeat demand for Durables indicates that the lagging manufacturing sector would show some recovery ahead.

US Census Bureau reported that Durable Goods Orders have expanded by 1.7% while the street was anticipating a contraction of 1%. May’s Durables data has outperformed April’s figure of 1.2%. Durables data excluding defense orders have expanded by 3.0% against expectations of a stagnant performance.

The US Dollar Index (DXY) is looking to extend its recovery above 102.62 as chances of a restart of policy-tightening by the Fed have solidified considering resilience in US Durables data. As per the CME Fedwatch tool, around 77% chances are in favor of a 25 basis point (bp) interest rate hike to 5.25-5.50%.

On the Eurozone front, the Euro remained in action on Tuesday after a hawkish speech from European Central Bank (ECB) President Christine Lagarde at the ECB forum of Central Banking. ECB Lagarde conveyed that inflation in Eurozone is extremely high and the central bank is required to make monetary policy sufficiently restrictive to tame price pressures. She further added the effect on inflation from rising wages has recently been amplified.

Risks of an elevated recession in the German economy have fueled as business morale has slipped consecutively for the second time. The Ifo Institute reported that the business climate index fell to 88.5 in June from the 91.5 figure recorded in May.

Investors should note that the German economy has already reported a technical recession by registering a contraction in Gross Domestic Product (GDP) figures consecutively for two quarters.