EUR/USD aims to test 1.0650 as Fed’s policy underpins risk-on impulse, US NFP in focus

• EUR/USD is trading sideways but may start rallying again amid broader weakness in the greenback.
• The Fed will reduce its balance sheet size at a much faster pace than in 2017-19.
• A European embargo on Russian oil can take place within six months.

The EUR/USD pair is oscillating in a narrow range of 1.0603-1.0642 in the Asian session after a firmer upside move from 1.0534. The asset is collecting more investors and will resume rallying higher to test 1.0650. An aggressive hawkish Fed policy has activated the ‘Buy on Rumor and Sell on News’ indicator, which is driving the risk-perceived currencies.

Fed chair Jerome Powell dictated the roadmap of balance sheet reduction along with a rate hike by 50 basis points (bps). The intention is to squeeze liquidity from the economy at a much faster pace by curtailing the whooping size of the $9 trillion balance sheet. A reduction in the balance sheet will be done by cutting $95 billion worth of assets ($60 billion of Treasuries and $35 billion of mortgage-backed securities (MBS)) monthly. Compared to the pace of the balance sheet reduction program initiated in 2017-2019 in which $50 billion worth of assets were targeted to reduce monthly. It states that the Fed is culling its assets at double the pace of the 2017-19 period.

Considering the multi-decade high inflation, it looks like the collaborative effort of rate hikes and quantitative easing is highly required to curb the inflation mess.

Meanwhile, the shared currency is expected to face the headwinds of oil supply as the European Union (EU) is looking to embargo oil from Russia within six months. Moving to another supplier or group of suppliers for 3.5 million barrels per day (bps) won’t be a cakewalk for the trading bloc. This could trigger the fears of a higher jobless rate further.

Going forward, the action in the asset will be handed over to the US economic data. The US Nonfarm Payrolls (NFP) will release on Friday and are expected to land at 394k against the prior print of 431k.