EUR/USD scales to near 1.0680 as Fed looks to trim policy tightening pace

• EUR/USD has climbed to near 1.0680 amid a sell-off in the US Dollar index led by a risk-on mood.
• A sheer drop in US wage inflation and PMI numbers is advocating for a slowdown in the policy tightening pace by the Fed.
• The ECB is looking to reach terminal rates this summer.

The EUR/USD pair has scaled to near 1.0680 after the resumption of Friday’s rally in the Asian session. The major currency pair has witnessed firmer demand amid a sell-off in the US Dollar Index (DXY). The asset is likely to remain in the grip of bulls as the Federal Reserve (Fed) is expected to decelerate its current pace of hiking interest rates amid accelerating recession fears.

Investors are pouring funds into risk-perceived assets like S&P500 futures, portraying a vigorous improvement in the risk appetite of the market participants. The 10-year US Treasury yields scaled lower to 3.56%. Meanwhile, the US Dollar Index has stretched its downside to near 103.27 and is highly expected to re-rest a six-month low around 103.00 amid a decline in wage inflation in the United States.

On Friday, the United States Bureau of Labor Statistics reported a drop in wage inflation (Dec) to 4.6% vs. the consensus of 5.0% and the former release of 4.8%. Federal Reserve (Fed) policymakers remained worried that higher wage inflation could result in a rebound in the Consumer Price Index (CPI) going ahead. The labor market is upbeat, which would force firms to offer higher wages to attract labor and it will leave higher liquidity to the households for disposal.

Apart from that, weaker US ISM Services PMI data after a weak Manufacturing PMI has triggered the risk of a further slowdown in the economy. Meanwhile, Chicago Fed President Evans quoted in Wall Street Journal (WSJ), “It was possible the economic data would support raising the policy rate by 25 basis points at the Fed's next gathering” as reported by Reuters.

Also, Atlanta Fed President Raphael Bostic warned that "The US economy is definitely slowing" led by a significant reduction in activities in housing and other interest rate sectors.

Meanwhile, European Central Bank (ECB) Governing Council member and French central bank governor Francois Villeroy de Galhau advocated last week, "it would be desirable to reach the right 'terminal rate' by next summer, but it is too early to say at what level.” After a decline in Eurozone inflation, investors are seeing ECB reaching an interest rate peak sooner.