EUR/USD retreats further from multi-year tops, slides to 1.2260

• EUR/USD witnessed some profit-taking amid year-end thin liquidity conditions.
• A bearish sentiment around the USD should help limit any corrective pullbacks.

The EUR/USD pair edged lower during the second half of the European session and dropped to fresh session lows, around the 1.2260 region in the last hour.

Having struggled to find acceptance above the 1.2300 mark, the pair witnessed some selling and eroded a part of the previous day's positive move to fresh 32-month tops. The pullback lacked any obvious fundamental catalyst and could be solely attributed to some profit-taking. Typical thin trading volumes on the last day of the year prompted investors to lighten their bullish bets, though the downside seems limited amid the underlying bearish sentiment around the US dollar.

Investors have been betting on a strong global economic recovery in 2021. This, along with the likelihood of additional US financial aid package, dragged the key USD Index to the lowest level since April 2018. Apart from this, expectations that the Fed will keep rates lower for a longer period and the prevalent risk-on environment should continue to undermine the safe-haven greenback.

Valeria Bednarik, FXStreet's Chief Analyst explains: “Reaching pre-pandemic employment levels is outside the foreseeable future, while inflation does not even worth mentioning. Depressed consumption will likely keep it subdued for longer than the most pessimistic central banks’ estimates. Anyway, optimism reigns in the wider perspective and despite the market’s turmoil that spurs safe-haven demand here and there.”

Even from a technical perspective, this week's breakout through a symmetrical triangle – part of a bullish pennant formation – might have already set the stage for a further appreciating move. Hence, any meaningful dip might be seen as a buying opportunity. This makes it prudent to wait for strong follow-through selling before confirming that the EUR/USD pair has topped out in the near-term.

Technical levels to watch