EUR/USD struggles to extend gains above 1.0870 as focus shifts to Fed-ECB policy

• EUR/USD is facing hurdles in extending the rally above 1.0870 ahead of Fed-ECB policy.
• A decline in US Employment Cost Index has bolstered the odds of a smaller interest rate hike by the Fed.
• Investors should brace for a bigger interest rate hike by the ECB as the inflationary pressures are still solid.

The EUR/USD pair is showing signs of a loss in the upside momentum after reaching to near the immediate resistance of 1.0870 in the early Tokyo session. The shared currency pair has already displayed a responsive buying action after dropping to near the round-level support at 1.0800 but is failing to bring initiative buyers on board, however, more upside is still on cards.

The rationale behind the strength of the Euro is the improved risk appetite of the market participants. Risk-perceived assets like S&P500 witnessed stellar demand after the United States Bureau of Labor Statistics showed that the Employment Cost Index for the fourth quarter of CY2022 has landed lower than expectations. The economic data was recorded at 1.0% lower than the consensus of 1.1% and the prior release of 1.2%.

Easing negotiation power for labor costs is music to the ears of the Federal Reserve (Fed), which is working hard to achieve price stability in the United States. A decline in the labor cost is going to leave less liquidity in the palms of households for disposal, which will further squeeze their spending and will trim inflation projections.

The US Dollar Index (DXY) fell heavily to near 101.70 from Tuesday’s high around 102.20 on the fact that the easing labor cost index has bolstered the odds of a decline in the policy tightening pace by the Fed. According to the projections, Fed chair Jerome Powell is expected to announce a 25 basis point (bps) interest rate hike to 4.50-4.75%.

On the Eurozone front, investors are awaiting the interest rate decision by the European Central Bank (ECB). Labor cost in the shared continent is still upbeat and the inflation rate is hovering above 9%, therefore, a bigger interest rate hike is expected by the market participants. ECB President Christine Lagarde might announce an interest rate hike of 50 bps ahead.