EUR/USD recovers sharply to near 0.9900 as DXY drops, ECB policy in focus

• EUR/USD has resurfaced sharply to near 0.9900 as the DXY has surrendered its morning gains.
• Fed Daly’s pessimism on interest rates has continued weighing pressure on the DXY.
• The ECB is set to announce a 75 bps rate hike this week.

The EUR/USD pair has recovered sharply to near the critical hurdle of 0.9900 in the early Asian session. The asset has displayed a responsive buying action as the risk appetite of investors is extremely solid.

S&P500 futures have extended their gains on Monday after a cheerful Friday. The index recovered its two-days losses after Federal Reserve (Fed) policymaker picked a less-hawkish stance on policy guidance. The US dollar index (DXY) has surrendered its morning gains in early Asia and has slipped below 112.00 again.

San Francisco Fed President Mary Daly warned of the risk of a slowdown in the economy due to escalating interest rates. Monetary policy has extremely tightened in a short span of time and now the Fed is needed to trim the current pace of rate hikes to avoid the economy dragging into an ‘unforced downturn’.

The commentary from Fed’s Daly called for a drop in the returns on US government bonds. The 10-year US Treasury yields dropped sharply to 2.20% after recording a fresh 14-year high at 4.34%.

On Monday, the US S&P PMI data will remain in the spotlight. The Manufacturing PMI is expected to decline to 51.2 vs. the prior release of 52.0 while the Services PMI may drop to 49.2 from 49.3 reported earlier.

Meanwhile, euro investors have shifted their focus toward the announcement of the interest rate decision by the European Central Bank (ECB). As mounting price growth is hurting the economic prospects of the Eurozone, ECB President Christine Lagarde will opt for a bigger rate hike this time. According to analysts from Rabobank, a 75 basis point (bps) interest rate hike is a done deal. They see the deposit rate reaching 3% by March next year.