EUR/USD aims to test weekly highs around 1.0600 ahead of US forward inflation indicator

The EUR/USD pair climbed above the psychological hurdle of 1.0500 in the New York session and is aiming to sustain above the same ahead. The major currency pair is expected to kiss a weekly high around 1.0600 amid a significant improvement in the risk appetite of the market participants.

Meanwhile, the US Dollar Index (DXY) has slipped below the round-level cushion of 105.00 as investors have shrugged off uncertainty about a recession situation in the United States economy. S&P500 recovered sharply on Thursday after three consecutive bearish trading sessions, portraying a recovery in the risk-on profile. The 10-year US Treasury yields have extended their gains to near 3.49% as the Federal Reserve (Fed) is set to hike the interest rate next week.

As the inflation rate is extremely far from the desired rate of 2% and the Fed has yet not reached the neutral rate, continuation of policy tightening is highly expected. Analysts at Danske Bank see a further hike in interest rates by 50 basis points (bps) and a hawkish message from Fed chair Jerome Powell for CY2023. Also, the neutral rate is expected at 5.00-5.25%.

On Friday, investors will focus on the release of the five-year Consumer Inflation Expectation data. A de-anchored inflation data could accelerate recession fears in the US economy as it will force Fed policymakers to look more at a higher interest rate peak than current projections.

Meanwhile, Eurozone investors are shifting their focus toward the interest rate decision by the European Central Bank (ECB), which will be announced next week. Analysts at Rabobank think that the ECB is likely to raise the policy rate by 50 basis points in December but note that they are not fully discounting the possibility of a 75 bps hike. They have forecasted a terminal rate at 3%.