EUR/USD steadily climbs closer to mid-1.0500s on softer USD, upside potential seems limited

• EUR/USD edges higher during the Asian session and draws support from a modest USD downtick.
• The uncertainty over the Fed’s future rate-hike path keeps a lid on the US bond yields and the USD.
• Bets that the ECB is done hiking rates might hold back traders from placing aggressive bullish bets.

The EUR/USD pair finds some support in the vicinity of the weekly low, around the 1.0525-1.0520 area, and ticks higher during the Asian session on Friday. Spot prices currently trade around the 1.0535-1.0540 region, up just over 0.10% for the day, and for now, seems to have stalled the overnight sharp retracement slide from a nearly three-week high.

In fact, the EUR/USD pair on Thursday registered its worst single-day drop since early October after the US consumer inflation figures revived bets for one more rate hike by the Federal Reserve (Fed) in 2023 and revived the US Dollar (USD) demand. Both the headline and Core CPI remain above the Fed's 2% target, supporting prospects for further policy tightening. This led to a sharp overnight rise in the US Treasury bond yields and triggered a massive USD short-covering rally.

That said, the recent dovish remarks by several Fed officials suggested that the US central bank is nearing the end of its rate-hiking cycle. This, in turn, keeps a lid on the US bond yields and fails to assist the USD to capitalize on the previous day's solid recovery from over a two-week high. Apart from this, a modest uptick in the US equity futures undermines the safe-haven buck and acts as a tailwind for the EUR/USD pair, though any meaningful appreciating move seems elusive.

The European Central Bank (ECB) policymakers expressed cautious optimism on Thursday that inflation was on its way back to 2% even without more rate hikes. This comes after the ECB signalled in September that the hike, its 10th in a 14-month-long fight against inflation, was likely to be its last. This, along with concerns that the economy was slowing and could even dip into recession, suggests that further ECB rate hikes may be off the table and should cap the EUR/USD pair.

Market participants now look to ECB President Christine Lagarde's comments during a panel discussion at the World Bank Group and the International Monetary Fund Annual Meeting in Morocco. This might influence the shard currency and provide some impetus to the EUR/USD pair. Traders will further take cues from Philadelphia Fed President Patrick Harker's speech, which, along with the preliminary Michigan Consumer Sentiment Index, will drive the USD demand.

Technical levels to watch