• EUR/USD is demonstrating volatility contraction as the focus has shifted to the US inflation data.
• A consecutive bullish session reported by S&P500 indicates that the risk profile is extremely solid.
• Improved risk appetite has weighed down the 10-year US Treasury yields to 3.54%.

The EUR/USD pair is displaying back-and-forth moves around 1.0750 in the early Tokyo session. The major currency major is showing extreme volatility contraction, which indicates that investors are not ready to build fresh positions before the release of the United States inflation data.

The risk profile seems extremely solid as S&P500 has recorded two consecutive bullish trading sessions. It seems that investors are optimistic on CY2023. Also, the demand for US government bonds remained upbeat, which led to a significant fall in the 10-year US Treasury yields to 3.54%. The US Dollar Index (DXY) continued its sideways profile around 103.00 ahead of the US Consumer Price Index (CPI) data.

This time, the inflation data is getting pivotal for the market participants as wage inflation has shown meaningful signs of deceleration, which Federal Reserve (Fed) policymakers were considering a major threat to the agenda of achieving price stability.

The headline CPI (Dec) is expected to continue its declining spree and may drop to 6.5% from the former figure of 7.1%. While the core CPI that excludes oil and food prices might slip to 5.7% from 6.0% reported earlier. Weaker retail demand, a spree of declining employment additions in the United States economy, a slowdown in economic activities, and now a fall in employment bills have collectively resulted in lower consensus for inflation projections.

On the Eurozone front, after European Central Bank (ECB)'s governing council member Mario Centeno, another ECB member and French central bank governor Francois Villeroy de Galhau said on Wednesday, the central bank should aim to reach the terminal rate by the summer. He further added that ECB needs to be pragmatic about the pace of rate hikes.