EUR/USD sees more upside above 1.0650 despite upbeat US NFP

• EUR/USD is expected to extend a rally above 1.0650 on less-hawkish Fed bets.
• A sheer drop in US Average Hourly Earnings will be added to the downside inflation filters.
• The USD Index witnessed a bloodbath, dropping to 103.50 amid the risk-on market mood.

The EUR/USD pair is hovering around 1.0650 in the early Asian session after a juggernaut rally on Friday. The major currency pair picked a sheer demand despite the release of the upbeat United States Nonfarm Payrolls (NFP) data. As per the US official employment data, the United States economy added 223K fresh jobs in December month, much higher than the consensus of 200K but lower than the former release of 256K.

The sentiment of the market participants turned highly positive as the impact of upbeat NFP was already discounted after solid Automatic Data Processing (ADP) Employment Change data. Apart from that, the catalyst that triggered the risk-appetite theme was the decline in the Average Hourly Earnings (Dec). S&P500 had a ball as the index soared more than 2.25%.

The Average Hourly Earnings dropped to 4.6% vs. the consensus of 5.0% and the former release of 4.8%. Investors were worried about the fact that a rise in labor demand would be offset by higher wage inflation as firms would offer higher wages to attract talent. Higher wage growth might lead to a rebound in overall inflation and will force the Federal Reserve (Fed) to either hike terminal rate projections or continuation of maintaining hawkish monetary policy beyond CY2023 or both.

The US Dollar Index (DXY) witnessed a bloodbath, dropping heavily from 105.00 to critical support around 103.50. The USD Index is highly expected to continue its downside momentum further. While the 10-year US Treasury yields dropped to 3.56%.

On the Eurozone front, the annual Harmonized Index of Consumer prices (HICP) (Dec) dropped to 9.2% vs. the expectations of 9.7% and the former release of 10.1%. Inflationary pressures dropped in Eurozone led by falling energy prices, which are delighting the European Central Bank (ECB).