The rally was caused by US economic data released yesterday and partly by the FOMC meeting minutes. Economists briefed Fed policymakers that the chances of a US recession in the next year had risen to almost 50% due to slowing consumer spending, global economic risks and further interest rate hikes in the US, something that the central bank does not plan to give up on at this point in time.

The concerns, detailed in the minutes of the Federal Open Market Committee meeting on November 1-2, were the first since the central bank began raising rates in March.

"Sluggish growth in real private domestic spending, a deteriorating global outlook, and tightening financial conditions were all seen as salient downside risks to the projection for real activity; in addition, the possibility that a persistent reduction in inflation could require a greater-than-assumed amount of tightening in financial conditions was seen as another downside risk," the minutes said. "The staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline."

Other economists are even more pessimistic, with experts surveyed by Bloomberg estimating a 65% chance of a recession next year, based on the median estimate. The Bloomberg Economics model puts the probability at 100%.

At the end of the November meeting, the US central bank decided to raise its key interest rate by three-quarters of a percentage point, which is three times the normal level. This was the fourth consecutive increase to lower inflation, which has skyrocketed this year to its highest level in four decades.

Meanwhile, officials have signaled that they plan to start decelerating the pace of tightening soon, which will give the Fed more time to assess the impact of previous rate hikes on the economy. During his post-meeting press conference, Fed Chairman Jerome Powell told reporters that he thought "no one knows whether there's going to be a recession or not and, if so, how bad that recession would be."

This week, Federal Reserve policymakers have already begun preparing the markets for adopting a softer stance on interest rates hikes this December. No one wants to knock out the economy, which has been surprisingly resilient enough to resist everything being done by the central bank. Yesterday's data was another wake-up call for the Fed, as business activity dipped into the red zone, now indicating a decline rather than slower growth. The manufacturing PMI for November stood at 47.6 points against 50.4 in the previous month, and services PMI went down to 46.1 points from 47.8. The composite PMI, which includes both indicators, fell to 46.3 points. Readings below 50 points indicates economic contraction. Initial jobless claims also surged by 240,000 this week, signaling a disruption in the labor market.

On the technical side, strong pressure on the U.S. dollar pushed the euro higher towards its monthly high. To continue going up, EUR/USD needs to break above 1.0480, which will drive the trading instrument to 1.0530. The pair may easily climb to 1.0570 above this level. If the pair declines and breaks below the support level of 1.0430, it will drop back to 1.0390, increasing the pressure on EUR/USD. From there it could fall to the low of 1.0340.

As for the technical picture of GBP/USD, the pound sterling continues to advance and has soared above the monthly highs. Bulls are now clearly focused on defending support at 1.2075 and breaking above 1.2135, which is limiting the pair's upside potential. Breaking above this level will make further recovery to the area of 1.2180 more likely. After that, the pound will have a chance to grow sharply towards 1.2230. If bears take control over 1.2075, it will strike a blow to the bulls' positions and push GBP/USD back to 1.2020 and 1.1960.