EUR/USD climbs to near 1.0740 as ECB to raise rates further despite German recession

The EUR/USD pair has climbed above the critical resistance of 1.0740 in the early European session after a firmer recovery from near the round-level support of 1.0700. The major currency pair is anticipated to extend further as the US Dollar Index (DXY) has extended its correction further to near 104.08.

S&P500 futures are holding losses generated in Asia as the overall market mood is quite cautious due to the US debt-ceiling issues. Despite narrowing the budget's spending proposal to $70 billion from the original offering of $1 trillion, the White House is failing to get approval for raising the $31 trillion US borrowing cap limit from Republican leaders.

Meanwhile, soaring expectations for a pause in the policy-tightening spell by the Federal Reserve (Fed) are weighing heavily on the USD Index. As tight credit conditions by US regional banks are effectively weighing on inflationary pressures, the Fed believes that more rate hikes for June monetary policy meeting are less certain.

On the Eurozone front, the German economy has fallen into recession after reporting a contraction in Q1 real Gross Domestic Product (GDP) by 0.3%. Investors should note that reporting a contraction for two consecutive quarters is considered a recession and the German economy also reported a contraction in Q4 of the prior year by 0.5%. This could force the European Central Bank (ECB) President Christine Lagarde to focus first on the economic outlook and later on inflationary pressures.

On the contrary, ECB policymaker Klaas Knot said that the ECB needs to raise the policy rate at least two more times, as reported by Reuters. He further argued that rates should stay put for a significant period of time following these increases.