- EUR/USD is witnessing a volatility contraction as investors await US GDP for fresh cues.
- The odds of a smaller interest rate hike by the Federal Reserve might get strengthened on a downbeat US GDP.
- European Central Bank is needed to continue hiking interest rates to tackle wage growth.
- EUR/USD is expected to shift into a new territory above 1.0930 amid favoring technical indicators.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
![EUR/USD stays below 1.1100, looks to post weekly losses](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/european-euro-coin-on-top-of-american-dollar-bill-11292130_XtraSmall.jpg)
EUR/USD stays below 1.1100, looks to post weekly losses
EUR/USD continues to trade in a narrow range below 1.1100 and remains on track to end the week in negative territory. Earlier in the day, monthly PCE inflation data from the US came in line with the market expectation, failing to trigger a reaction.
![GBP/USD struggles to find a foothold, trades near 1.3150](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/iStock-157771037_XtraSmall.jpg)
GBP/USD struggles to find a foothold, trades near 1.3150
GBP/USD stays on the back foot and trades in negative territory at around 1.3150 on Friday. The US Dollar holds its ground following the July PCE inflation data and doesn't allow the pair to stage a rebound heading into the weekend.
![Gold retreats toward $2,500 ahead of the weekend](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/gold-bars-50657756_XtraSmall.jpg)
Gold retreats toward $2,500 ahead of the weekend
Gold stays under modest bearish pressure and declines toward $2,500 in the American session on Friday. The 10-year US Treasury bond yield edges higher toward 3.9% after US PCE inflation data, causing XAU/USD to stretch lower.
![Week ahead – Investors brace for NFP amid Fed rate cut speculation](https://editorial.fxstreet.com/images/Macroeconomics/EconomicIndicator/Employment/NFP/america-back-to-work-gm178972493-25143312_XtraSmall.jpg)
Week ahead – Investors brace for NFP amid Fed rate cut speculation
Here comes another NFP week, with investors eagerly awaiting the results as they try to discern the size and pace of the Fed’s forthcoming rate cuts. The weaker than expected July numbers triggered market turbulence, instilling fears about a potential recession in the US.
![Easing Eurozone inflation to back an ECB rate cut in September](https://editorial.fxstreet.com/images/Macroeconomics/Countries/Europe/Eurozone_countries/Eurozone/eu-flags-flying-at-the-european-commission-building-brussels-belgium-24759579_XtraSmall.jpg)
Easing Eurozone inflation to back an ECB rate cut in September Premium
Eurostat will publish the preliminary estimate of the August Eurozone Harmonized Index of Consumer Prices on Friday, and the anticipated outcome will back up the case for another European Central Bank interest rate cut when policymakers meet in September.
![Moneta Markets review 2024: All you need to know](https://editorial.fxstreet.com/images/IT/Testing/Review/FXSBadgeCertifiedBackg_XtraSmall.png)
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.