EUR/USD turns sideways around 1.0900 ahead of US NFP, Fed-ECB policy divergence trims

• EUR/USD is demonstrating a sideways auction ahead of the US NFP data.
• A 50 bps interest rate hike by the ECB has trimmed the Fed-ECB policy divergence.
• Eurozone core inflation has remained stubborn and demands more attention from ECB policymakers.

The EUR/USD pair is displaying a back-and-forth action around 1.0900 after a pullback move from 1.0885 in the early Asian session. The major currency pair has turned sideways ahead of the United States Nonfarm Payrolls (NFP) data, which will release on Friday. On Thursday, the Euro witnessed a massive sell-off after a sheer recovery move by the US Dollar Index (DXY) and the announcement of 50 basis points (bps) interest rate hike by the European Central Bank, which trimmed the Federal Reserve (Fed)-ECB policy divergence.

The USD Index is showing signs of volatility contraction after witnessing some volatile moves and has now shifted into a rangebound auction around 101.40. Meanwhile, S&P500 settled Thursday’s session on a bullish note, portraying that the risk-appetite theme is intact. The 500-US stock basket has already shown a three-day winning spell and is expected to continue its upside momentum further. The demand for US government bonds remained subdued, which led to a minor gain in the 10-year US Treasury yields above 3.40%.

On Thursday, ECB President Christine Larage pushed interest rates to 2.50% by announcing a 50 bps interest rate hike in line with the street estimates. No doubt, the Eurozone inflation has started softening after a sheer decline in energy prices and a recovery in supply chain disruptions. However, the ECB is required to restrict its monetary policy further as the inflation rate is extremely far from the desired rate of 2%.

Led by a deceleration in the energy price, the headline price index has come down for January month to 8.5% but the core inflation that strips oil and food prices has remained stubborn and is demanding exclusive attention from the ECB policymakers.

For further guidance, US NFP data will be keenly watched. The economic data is seen at 185K lower than the former release of 223K. Apart from that, the Unemployment Rate is expected to escalate to 3.6% vs. 3.5% in the prior release.