EUR/USD rebound above 1.0840 as investors anticipate narrowing Fed-ECB policy divergence

• EUR/USD has shown recovery above 1.0840 amid expectations of a decline in Fed-ECB policy divergence.
• The Fed is expected to hold rates steady in June as tight credit conditions are effectively weighing on US inflation.
• ECB Lagarde has already made clear that more than one interest rate hike is appropriate.

The EUR/USD pair has shown some recovery from the immediate support of 1.0835 in the Asian session. The major currency pair is expected to accelerate further as the US Dollar Index (DXY) has retreated after failing to extend its short-lived pullback above 102.90.

S&P500 futures have recorded nominal losses in the Asian session, portraying a minor caution in the overall risk-on market mood. US equities witnessed significant buying interest on Wednesday after US President Joe Biden remained confident that the US debt-ceiling will be raised. However, the approval is coming with a compromise of the higher budget deficit.

The US Dollar Index (DXY) has faced selling pressure while attempting to recapture the 103.00 resistance as the Federal Reserve (Fed) is expected to hold interest rates steady in June as tight credit conditions are effectively weighing on United States inflation.

Investors are underpinning Euro against the US Dollar in anticipation that the continuation of interest rate hikes by the European Central Bank (ECB) and a pause in the policy tightening spell by the Fed will narrow the Fed-ECB policy divergence ahead.

ECB President Christine Lagarde has already made clear that more than one interest rate hike is appropriate in the battle against stubborn Eurozone inflation.

Economists at Commerzbank still expect a solid EUR/USD performance this year. They added “Our ECB watchers continue to expect the ECB to resist rate cuts next year. As long as this is the case, while the Fed is cutting, it still seems plausible to us to bet on well-supported EUR/USD levels towards the end of the year.”