EUR/USD Outlook: Bulls at the mercy of USD price dynamics, focus shifts to US CPI on Friday

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  • A modest USD weakness assisted EUR/USD to gain some positive traction on Wednesday.
  • Geopolitical tensions, Fed rate hike bets should revive the USD demand and cap gains.
  • Investors might also refrain from placing aggressive bets ahead of the US CPI on Friday.

The EUR/USD pair regained positive traction on Wednesday and built on the previous day’s late rebound from a one-and-half-week low, around the 1.1230-25 region. Against the backdrop of a generally positive risk tone, retreating US Treasury bond yields undermined the safe-haven US dollar. This, in turn, was seen as a key factor that provided a modest lift to the major, though any meaningful recovery still seems elusive.

Investors turned cautious after US President Joe Biden threatened to impose economic and other measures on Russia if it invades Ukraine. This comes after the US recently announced that it would boycott the Winter Olympics in Beijing in protest of China’s alleged violations of human rights and actions against Muslims in Uyghur. Rising geopolitical tensions should keep a lid on any optimistic move in the financial markets.

Apart from this, firming expectations that the Fed would tighten its monetary policy sooner rather than later to contain rising inflationary pressures should act as a tailwind for the USD. Hence, the market focus will remain glued to the release of the US consumer inflation figures on Friday. The data will influence the Fed’s decision to taper its stimulus at a faster pace and set the stage for an eventual interest rate hike in 2022.

Heading into the key data risk, investors might prefer to wait on the sidelines and refrain from placing aggressive bets. This might further contribute to capping the upside for the major amid absent relevant market moving economic releases from the Eurozone. That said, a scheduled speech by the European Central Bank (ECB) President Christine Lagarde could influence the shared currency and provide some impetus to the EUR/USD pair.

Later during the early North American session, traders might take cues from the release of JOLTS Job Openings data from the US. Apart from this, the US bond yields, along with the broader market risk sentiment will drive the USD demand and produce some trading opportunities around the pair.

Technical outlook

From a technical perspective, the near-term bias remains tilted in favour of bearish traders and any subsequent move up might still be seen as a selling opportunity. The pair’s inability to move back above the 23.6% Fibonacci level of the 1.1692-1.1186 downfall validates the negative outlook. This, in turn, suggests that the intraday move up runs the risk of fizzling out rather quickly. Nevertheless, the pair remains on track to retest sub-1.1200 levels or the YTD low set on November 25.

This is followed by support near the 1.1170-65 resistance breakpoint, below which the pair could slide to the 1.1145 support area. The downward trajectory has the potential to drag the pair further towards the 1.1100 round-figure mark.

On the flip side, momentum beyond the 1.1300 mark is likely to confront stiff resistance near the post-NFP swing high, around the 1.1330-35 region. Some follow-through buying could push the pair back towards the 1.1380-85 resistance zone (38.2% Fibo. level) en-route the 1.1400 mark. The momentum could further get extended towards the next relevant hurdle, around the 1.1440 area or the 50% Fibo. level.