The EURUSD pair has displayed a rapid recovery, resembling a V-shape pattern, as it found support at 1.0670 during the European session. This resurgence has pushed the major currency pair back above 1.0700, driven by a significant sell-off in the US Dollar Index (DXY). However, the upside potential for the USD Index appears limited, as investors lack confidence in the likelihood of an additional interest rate hike announcement from the Federal Reserve (Fed).
During London trading hours, S&P500 futures are maintaining slight losses. Although US equities experienced notable buying interest on Tuesday, investors seem to be adopting a more cautious approach, despite an overall optimistic market sentiment.
Considering the evident downward movement of the US Dollar Index (DXY), there is a possibility that the support level at 104.00 might be broken. Based on the CME Fedwatch tool, the chances of the Fed announcing a pause in its June policy, with no changes to the interest rate, are estimated at over 73%.
The bleak economic prospects of the United States economy contribute to the increased likelihood of the Fed pausing its policy-tightening measures. With seven consecutive months of contraction in US factory activity and the service sector struggling to avoid a contraction phase, expectations of a gloomy economic outlook suggest the need for a temporary pause in policy adjustments.
The Eurozone faces economic turmoil, which has led credit rating agencies to downgrade its rating. Germany, the largest economy in the Eurozone, is currently in a recession, with consecutive quarters of contracting Gross Domestic Product (GDP) and weak factory activity. These unfavorable conditions, coupled with high inflation, present a challenging situation for the shared continent.
The news of the USD Index facing a sell-off and the likelihood of the Fed pausing its policy-tightening measures have significant implications for forex markets. The EUR/USD pair's V-shaped recovery and the overall cautious market sentiment may lead to increased volatility in currency pairs, particularly involving the Euro and the US Dollar. Traders and investors closely monitoring forex markets should consider the potential impact of these developments on their trading strategies and positions.