EUR/USD declines towards 1.0500 on tight US labor market, Eurozone Inflation eyed

• EUR/USD is expected to display more weakness to near 1.0500 amid upbeat US ADP Employment data.
• Bumper additions of fresh payrolls in the US will be offset by the promise of higher wages.
• The Eurozone inflation is seen lower amid falling energy prices.

The EUR/USD pair is hovering around the critical support of 1.0520 in the early Tokyo session. The major currency pair is likely to extend its downside journey to near the psychological support of 1.0500 as the tight labor market in the United States has triggered the risk of continuation of elevated interest rates by the Federal Reserve (Fed) beyond CY2023.

Risk-perceived assets like S&P500 witnessed extreme selling pressure from investors as the better-than-anticipated addition of fresh payrolls in the United States labor market for December month might spurt the wage inflation ahead. Investors underpinned the risk-aversion theme, which led to a rally in the US Dollar Index (DXY). The USD Index soared to near 105.00 amid an improvement in safe-haven appeal. A decline in investors’ risk appetite also trimmed the demand for US government bonds.

The Automatic Data Processing (ADP) agency of the United States reported a healthy improvement in the number of employment additions for December month to 235K vs. the expectations of 150K and the former release of 127K. It is highly transparent that higher requirements for talent will be offset by offering higher wages, which would spurt wage growth and therefore leave individuals with more funds for disposal. The expression could bring a recovery in the price index through bumper retail demand.

Going forward, the release of the United States Nonfarm Payrolls (NFP) data will provide more clarity on the employment status. The Unemployment Rate is seen unchanged at 3.7%. Apart from that, the release of the Average Hourly Earnings data will be of utmost importance.

On the Eurozone front, investors will keep the focus on the release of the Harmonized Index of Consumer Prices (HICP) data, which will release on Friday. Considering the drop in energy prices and German inflation, it is highly likely that inflationary pressures in the Eurozone economy will follow the same path.

Meanwhile, European Central Bank (ECB) policymaker Francois Villeroy de Galhau said in a New Year’s address that “It would be desirable to reach the right ‘terminal rate’ by next summer, but it is too early to say at what level” as reported by Reuters.