Euro struggles below 1.07

The EUR/USD currency pair has dropped to near 1.0670 after the release of weaker-than-anticipated German Factory Orders, Eurozone Retail Sales, and an upbeat US Dollar. The shared currency pair is expected to extend its downside further.

The overall market mood is extremely cautious as weak US economic activities have raised hopes of a recession in the economy ahead. However, Goldman Sachs has shared distinct views about the US recession. The giant investment banking firm has slashed the probability of the US economy reporting recession to 25% from prior chances of 35%. The catalysts behind receding fears of the US recession are a strong labor market and improved business sentiment, as reported by Bloomberg.

Meanwhile, the US Dollar Index (DXY) has extended its resilient recovery to near 104.26 despite mixed cues about Federal Reserve’s (Fed) June monetary policy. Going forward, the lack of US economic indicators releases would keep the entire focus on macroeconomic events.

Contrary to that, the demand for US government bonds has increased ahead of voting for US debt-ceiling bill in Parliament. This has led to a fall in 10-year US Treasury yields to near 3.68%. A poll from Reuters showed that neither US President Joe Biden's Democrats nor Republicans in Congress emerged as a clear winner in the battle to raise the $31.4 trillion debt ceiling.

The puzzle of whether the Federal Reserve will raise interest rates in June or will keep the monetary policy steady has remained the talk of the town. And, now the release of weak US Services PMI on Monday has added to uncertainty.

On Monday, US ISM Services PMI managed to dodge the 50.0 threshold that separates the boundary of expansion from the contraction phase. The Service PMI for May landed lower at 50.3 vs. the consensus of 51.5. This indicates that the economic indicator has hardly defended the contraction phase and a mild expansion is being recorded in service activity.

Last week, the US Manufacturing PMI contracted for the seventh straight month. It is highly likely that a collaborative impact of contracting factory activity and mildly expanded service activity could push the United States economy into recession.

It seems that firms in the United States region are facing the wrath of higher interest rates by the Federal Reserve and tight credit conditions by US regional banks, which has led to a decline in their overall productivity.

On the other side, the number of fresh talent additions in the labor market is significantly growing each month, which could keep consumer spending at elevated levels and accelerate demand-pull inflation. Therefore, the street is divided about Federal Reserve’s interest rate policy stance for June.

Economic indicators have uncovered its economic conditions. Deutsche Bundesbank reported a contraction in monthly Factory Orders by 0.4% while the street was anticipating an expansion by 3.8%. Annual Factory Orders contracted significantly by 9.9% vs. the estimates of 8.4% contraction.

Also, Eurozone Retail Sales (April) displayed a poor show. Monthly Retail Sales remained stagnant while the street was anticipating an expansion by 0.2%. Annual Retail Sales contracted by 2.6% vs. expectations of -1.8%. Weak spending and Factory Orders that indicate forward demand indicate that the overall demand in the economy is losing its resilience, which will weigh more pressure on inflation ahead.

In spite of contracting activities, the European Central Bank (ECB) is expected to raise interest rates further to tame stubborn inflation. European Central Bank (ECB) President Christine Lagarde reiterated on Monday that price pressure remains strong in the Euro area.

Economists at Nomura expect the European Central Bank to raise rates twice more from here for a total of 50 basis points in June and July for a terminal rate of 3.75% which may mark the end of the rate hiking cycle.