EUR/USD drops below 1.0900 as market mood sours ahead of US NFP, ECB sees two more hikes

• EUR/USD has shifted below the immediate support of 1.0900 amid the risk-off market mood.
• Federal Reserve might continue tightening the monetary policy further as the labor cost index has not slowed down yet.
• European Central Bank may announce two more interest rate hikes by May to tame high inflation.
• EUR/USD is expected to find an intermediate cushion around 1.0885 after a perpendicular sell-off.

EUR/USD has surrendered the round-level support of 1.0900 in the Asian session. The major currency pair is facing sheer heat as investors have underpinned the risk aversion theme ahead of the release of the United States Nonfarm Payrolls (NFP) data. The Euro witnessed a massive sell-off on Thursday after the interest rate decision by the European Central Bank (ECB) in which the central bank pushed interest rates to 2.50% by announcing a 50 basis point (bp) interest rate hike.

S&P500 futures have met with significant offers in the Tokyo session, showing signs of a halt in the three-day winning spell amid anxiety ahead of the US Employment data. The US Dollar Index (DXY) is struggling to extend above 101.40 after a minor correction from above 101.50, however, the upside bias seems favored due to a sheer decline in investors’ risk appetite. The return generated by 10-year US Treasury bonds has further dropped below 3.39%.

United States NFP data to provide clarity on employment status

Wednesday’s release of the downbeat US Automatic Data Processing (ADP) Employment Change and Job Openings data indicated that labor demand is exceeding the supply in the United States. As per the ADP Employment data, the US economy added 105K jobs in January while job openings showed resilience portraying an absence of an adequate labor force. Also, the US Department of Labor showed a surprise decline in the number of individuals applying for jobless claims for the first time last week to 183K vs. the consensus of 200K. Despite rising interest rates by the Federal Reserve (Fed) and declining economic activities, the US labor market is showing resilience.

According to the estimates, the US NFP data is seen at 185K lower than the former release of 223K. Apart from that, the Unemployment Rate is expected to escalate to 3.6% vs. 3.5% the prior release.

Apart from the official US employment data, investors will also focus on the US ISM Services PMI data. The Services PMI is expected to escalate to 50.3 from the former release of 49.6 while the New Orders Index could jump to 57.6 against 45.2 released earlier.

Fed might not pause policy tightening sooner

After observing a downtrend in the US Consumer Price Index (CPI) and the presence of evidence that invokes confidence for a further slowdown in the inflationary pressures, the street is expecting a pause in the restrictive monetary policy by the Federal Reserve. From the swap market perspective, traders are pricing for an interest rate peak at 4.88% by summer followed by a rate cut to 4.40% by December, as reported by Reuters.

From declining consumer spending and Producer Price Index (PPI) to the slowdown in economic activities, each inflation indicator is calling for a continuation of inflation softening ahead. However, the labor cost index is still a concern for Fed chair Jerome Powell as higher purchasing power with households could trigger revenge buying and therefore a jump in retail demand.

On Friday, the Average Hourly Earnings data is seen at 4.9% vs. the prior release of 4.6% on an annual basis. While monthly data is seen steady at 0.3%. Led by exceeding labor demand against the supply, higher negotiation power in favor of job seekers could dent the price index declining trend, which can shrug off the rumors calling for a pause in the policy tightening pace by the Federal Reserve.

ECB sounds hawkish on interest rate guidance

An interest rate hike of 50 basis points (bps) by the European Central Bank was widely expected. Softening energy prices and easing supply chain bottlenecks have trimmed headline inflation while the core price index that excludes oil and food prices is still solid in Eurozone. Also, ECB President Christine Lagarde cleared that the disinflationary process has yet not been initiated in Eurozone. Therefore, the European Central Bank will continue hiking interest rates to achieve price stability.

For interest-rate guidance, European Central Bank Lagarde explicitly told that the central bank would stay the course in the fight against high inflation and that the magnitude of the interest rate hike will remain similar in March. While two members of the ECB's rate-setting Governing Council told Reuters that at least two more rate hikes are expected ahead.

EUR/USD technical outlook

EUR/USD witnessed a massive sell-off after an Inventory Distribution chart formation on an hourly scale. The inventory distribution in a minor range of 1.1006-1.1033 indicates a shift of inventory from institutional investors to retail participants. EUR/USD might found an intermediate cushion around February 2 low at 1.0885.

The 20-and 50 period Exponential Moving Averages (EMAs) are on the verge of delivering a bear cross, which will strengthen further downside bias.

While, the Relative Strength Index (RSI) (14) has shifted into the bearish range of 20.00-40.00, which indicates that the downside momentum has been triggered.