EUR/USD aims to explore territory above a nine-month high at 1.0930 amid subdued USD Index

EUR/USD is showing signs of volatility contraction after attaining stability above the critical resistance of 1.0900 in the early European session. The major currency pair is expected to extend its upside journey above a nine-month high at 1.0926 as the US Dollar Index (DXY) is demonstrating a subdued performance ahead of the release of the United States Gross Domestic Product (GDP) data.

The USD Index is struggling to sustain above the immediate cushion of 101.20. A breakdown of the same will result in a fresh downside in the asset. The expression of a decent downtrend in the United States Consumer Price Index (CPI) for the past few months has weakened the US Dollar dramatically. Analysts at Wells Fargo warned that the greenback has already embarked on a prolonged period of depreciation that could last into 2024. They further added that relative economic growth performance and monetary policy outlook have turned less supportive of the US dollar.

S&P500 futures are holding their morning gains, portraying a risk-on market mood. The 500-US stock basket is fighting with full efforts against uncertainty about the release of corporate earnings. Meanwhile, the improved risk appetite of the market participants is weighing on the yields generated by the US government bonds. The 10-year US Treasury yields have dropped below 3.44%.

Rising bets for smaller Fed’s rate hike weigh on US yields

A decline in retail demand, squeezing demand for fresh talent, and lower power in favor of producers for the pricing of goods and services have bolstered the expectations of a further decline in inflation projections. The context is to support the Federal Reserve to decelerate the pace of hiking interest rates. The odds for a smaller interest rate hike by the Federal Reserve are soaring. As per the CME FedWatch tool, the chances of a 25 basis point (bps) interest rate hike by the Federal Reserve have soared more than 97%.

US recession fears might trigger if GDP contracts

Investors are aware of the fact that extreme policy tightening measures taken by Federal Reserve chair Jerome Powell and his teammates have restricted firms to bank upon borrowings. Rising interest obligations have resulted in lower operating margins for firms. Also, weaker demand projections have forced the firms to avoid operating at full capacity. Investors will get more clarity about the scale of economic activities after the release of the US GDP data. Considering the fact that Fed chair Jerome Powell has tightened the monetary policy on an extreme note in CY2022, the street is expecting a contraction in the scale of economic activities. As per the projections, the economic data is seen at 2.6% lower than the former release of 3.2%. The release of the lower-than-anticipated GDP numbers for the fourth quarter of CY2022 will escalate recession fears.

Apart from that, the catalyst that will impact the US Dollar Index (DXY) is the preliminary Core Personal Consumption Expenditure (PCE) for the fourth quarter of CY2022. The economic data is expected to escalate to 5.3% from the prior release of 4.7%. Also, the Durable Goods Orders data will be keenly watched, which is seen at 2.5% vs. -2.1% in the prior release.

Bets accelerate for hawkish ECB policy

There is no denying the fact that inflationary pressures are softening in Eurozone as supply chain bottlenecks are easing. However, the economy is still facing wage growth as a roadblock in their agenda of achieving price stability. The European Central Bank (ECB) has already pushed its interest rates to 2.5% to tame stubborn inflation. But European Central Bank policymakers are still not satisfied with the scale of the interest rate and are reiterating more interest rate hikes ahead.

ECB Governing Council member Gabriel Makhlouf said on Wednesday "We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions," as reported by Reuters. He further added that they need to increase rates again at the March meeting.

EUR/USD technical outlook

EUR/USD is auctioning in a Rectangle formation on a four-hour scale, which indicates a sheer contraction in volatility. The major currency pair might display wider ticks and heavy volume after the explosion of the squeezed volatility. The 20-period Exponential Moving Average (EMA) at 1.0887 is constantly providing support to the Euro. Also, advancing 50-EMA at 1.0850 adds to the upside filters.

Upside momentum is still active as the Relative Strength Index (RSI) (14) has not surrendered oscillation in the bullish range of 60.00-80.00.