EUR/USD Analysis: Corrective bounce falters near mid-1.1300s, focus remains on US CPI

• Renewed USD buying prompted fresh selling around EUR/USD on Thursday.
• Hawkish Fed expectations, rising US bond yields acted as a tailwind for the USD.
• The cautious market mood further benefitted the greenback’s safe-haven status.

The EUR/USD pair witnessed some selling on Thursday and eroded a part of the previous day's strong gains twhich took it to a one-week high, around mid-1.1300s. The pair remained depressed throughout the early European session and was pressured by the emergence of fresh US dollar buying. A further rise in the US Treasury bond yields, along with the cautious market mood drove some haven flows back towards the greenback. In fact, the yield on the benchmark 10-year US government bond shot back above the 1.50% threshold amid firming expectations for a faster policy tightening by the Fed.

Investors seem convinced that the Fed will hike interest rates sooner rather than later amid worries about the persistent rise in inflationary pressures. The money markets have been pricing in the possibility for an eventual liftoff in May 2022. Hence, the focus will remain glued to the latest US consumer inflation figures, due for release on Friday. The CPI report will influence the Fed's decision to taper its stimulus at a faster pace and set the stage for an imminent interest rate hike. This, in turn, will drive the greenback ahead of the FOMC policy meeting next week.

Meanwhile, mixed headlines on the Omicron variant of the coronavirus kept a lid on recent optimism in the markets. In the latest development, BioNTech and Pfizer said on Wednesday that a three-shot course of their COVID-19 vaccine was able to neutralise the Omicron variant in a laboratory test. Conversely, the UK Prime Minister Boris Johnson on Wednesday imposed fresh COVID-19 restrictions in England to slow the spread of the new variant. This, along with escalating geopolitical tensions, weighed on investors' sentiment and benefitted the greenback's relative safe-haven status.

The US recently announced that it will not send an official delegation to the 2022 Winter Olympics in Beijing to protest against China's alleged violations of human rights. Similarly, relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose strong economic and other measures on Russia if it invades Ukraine. The fundamental backdrops favour the USD bulls and a further downfall for the major. In the absence of any major market-moving economic releases, the USD price dynamics will be looked upon for some short-term trading impetus.

Technical outlook

From a technical perspective, the pair’s inability to capitalize on the overnight positive move and the emergence of fresh selling on Thursday warrants some caution for bullish traders. That said, it will still be prudent to wait for some follow-through selling back below the 1.1300 mark before positioning for the resumption of the recent bearish trend. The pair might then accelerate the fall towards intermediate support near the 1.1260-55 region before dropping to test weekly swing low, around the 1.1230-25 region.

This is followed by the YTD low, or levels just below the 1.1200 mark set on November 25, which if broken decisively will be seen as a fresh trigger for bearish traders. The subsequent downfall has the potential to drag the pair to the 1.1145 support area en-route the 1.1100 round-figure mark.

On the flip side, momentum beyond mid-1.1300s is likely to confront some resistance near the 1.1380-85 area, marking the 38.2% Fibonacci level of the 1.1692-1.1186 downfall. A sustained breakthrough, leading to a subsequent strength above the 1.1400 mark could push the pair further towards the 50% Fibo. level, around the 1.1440 region.