EUR/USD marches towards 1.0900 as Fed/ECB policy stance diverges

• EUR/USD is eyeing a re-test of 1.0900 amid the risk-on market mood.
• Investors' risk-taking capacity is improving again as the Fed might trim the policy tightening pace further.
• The ECB looks all set to hike interest rates further by 50 bps to 3.25%.

The EUR/USD pair is aiming to extend its journey toward the round-level resistance of 1.0900 in the Asian session. The asset has picked strength as the risk-on impulse is gaining traction again. The demand for the major currency pair is escalating maid divergence policy stances for the Federal Reserve (Fed) and European Central Bank (ECB) interest rate hike projections.

Meanwhile, investors’ risk appetite is improving again as the S&P500 futures have recovered their morning losses. The US Dollar Index (DXY) has eased further to near 101.50 amid rising chances of a 25 basis points (bps) interest rate hike by the Fed in its upcoming meeting in February. Also, the 10-year US Treasury yields have dropped to near 3.51%.

Subdued retail demand, declining employment at a healthy pace, a fall in the scale of economic activities, and firms offering products at lower prices at factory gates are impacting the economic prospects in the United States but are strengthening the Fed in its combat against higher inflation. This is resulting in rising expectations that the Federal Reserve (Fed) might trim the extent of the interest rate hike again.

Fed chair Jerome Powell has already trimmed the interest rate hike extent to 50 basis points (bps) in its December monetary policy meeting after four consecutive 75 bps rate hikes. The Fed is expected to hike interest rates by 25 bps ahead.

On the Eurozone front, ECB President Christine Lagarde and his teammates are favoring the continuation of higher interest rate hikes to soften inflationary pressures significantly.

ECB policymaker Peter Kazimir cited on Monday that inflation easing was good news but added that it was not a reason to slow the pace of interest rate hikes, as reported by Reuters. He further added, "I am convinced that we need to deliver two more hikes by 50 basis points (bps).”

The latest Reuters poll of economists claims the European Central Bank (ECB) hiking rates by another 50 bps at its February monetary policy meeting while the policy rate is expected to reach 3.25% by mid-year.