EUR/USD faces fragile barricades below 1.0900 ahead of German GDP data

• EUR/USD is looking to extend gains beyond 1.0870 amid the risk-on market mood.
• A decline in the US core PCE price index has strengthened the expectations of a smaller rate hike by the Fed.
• German GDP might remain stagnant in the last quarter of CY2022.

The EUR/USD pair is struggling to extend its recovery move above the immediate resistance of 1.0870 in the early Tokyo session. The major currency pair delivered a rebound move from the previous week’s low around 1.0840 amid a restricted upside in the US Dollar index (DXY).

The USD Index failed in delivering a break above the critical resistance of 101.80 as the United States Bureau of Economic Analysis reported a decline in the annual Federal Reserve (Fed)’s preferred inflation tool- core Personal Consumption Expenditure (PCE) Price Index (Dec) to 4.4% from the former release of 4.7%. However, the monthly PCE price index data escalated to 0.3% from the expectations and the prior release of 0.2%.

A decline in the core PCE data was already expected by the market participants considering the drop in the Consumer Price Index (CPI) and the Producer Price Index (PPI) for December month. This has bolstered the odds of a smaller interest rate hike by the Fed in its February monetary policy meeting, which is scheduled for Wednesday.

Investors’ risk appetite is solid as risk-perceived assets like S&P500 futures ended Friday and last week with significant gains. The 500-US stock basket posted gains straight for the third week despite softening demand. Meanwhile, the 10-year US Treasury yields managed to sustain above the critical resistance of 3.50%.

On the Eurozone front, investors will deliver a decent action after the release of the preliminary German Gross Domestic Product (GDP) (Q4) data on Monday. The economic data on a quarterly basis is seen at 0% lower than the prior figure of 0.4%. European Central Bank (ECB) policymakers have been reiterating that the ECB might face a slight recession, however, the odds of a deep recession have been trimmed considering the resilience in the economy due to the tight labor market and easing supply chain bottlenecks.

This week, the major focus will be on the interest rate decision by ECB President Christine Lagarde, which is scheduled for Thursday. As per the consensus, the ECB might hike the interest rates by 50 basis points (bps) to 2.50%.