EUR/USD sees more upside above 1.0700 ahead of German Inflation

• EUR/USD is expected to extend its upside journey above 1.0710 on hawkish expression from ECB Lagarde.
• German HICP is likely to advance to 11.8% against the prior release of 11.3%.
• The US Dollar Index dropped to near its six-month low below 103.10.

The EUR/USD pair turned sideways near the round-level resistance of 1.0700 after a decent rally. The major currency pair is expected to display resumption in the upside journey above the immediate hurdle of 1.0710 as the risk appetite theme got elevation.

Risk-perceived assets like S&P500 ended 2022 on a cautious note as analysts have mixed responses over economic projections. On contrary, the risk-sensitive currencies witnessed firmer demand from the market participants. The US Dollar Index (DXY) delivered a downside break of the consolidation formed in a 103.37-104.57 range. While the 10-year US Treasury yields continued their strength and rose to near 3.88%.

The Euro is likely to dance to the tunes of the preliminary German Harmonized Index of Consumer Prices (HICP) data, which will release on Tuesday. As per the estimates, the inflation indicator is likely to advance to 11.8% against the prior release of 11.3%. A rebound in the German inflation is likely to be the outcome of a lower mortgage rate than nominal wage growth.

Analysts at Natixis are of the view that “In the Eurozone, the real long-term interest rate is well below potential growth, and the mortgage rate is lower than nominal wage growth; monetary policy is therefore completely expansionary.”

Also, European Central Bank (ECB) President Christine Lagarde cited higher wage rates as responsible for more juice to already firmer inflation.  ECB President cited that the central bank must prevent this from adding to already high inflation, as reported by Reuters.

For the United States front, analysts at Natixis cited the monetary policy expression as a restrictive one as the mortgage rate is higher than nominal wage growth. Going forward, United States S&P Manufacturing PMI data will remain in focus, which is expected to remain stable at 46.2.