EUR/USD hangs near multi-day low, seems vulnerable below 1.1300 ahead of the Fed/ECB

• EUR/USD witnessed fresh selling on Monday amid a goodish pickup in the USD demand.
• Expectations for an early policy tightening by the Fed acted as a tailwind for the greenback.
• Diverging ECB-Fed monetary policy outlooks support prospects for a retest of the YTD low.

The EUR/USD pair maintained its offered tone through the mid-European session and was last seen hovering just a few pips above a four-day low, around the 1.1260 region touched in the last hour.

The pair struggled to capitalize on Friday's intraday move up of around 60 pips, instead met with a fresh supply on the first day of a new week amid resurgent US dollar demand. The prospects for an early policy tightening by the Fed continued acting as a tailwind for the greenback. This, along with a more dovish European Central Bank (ECB), exerted some downward pressure on the EUR/USD pair.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. The market bets were reaffirmed by the data released on Friday, which showed that the headline CPI accelerated to the highest level since 1982. Adding to this, the core CPI recorded the sharpest rise since mid-1991 and validated hawkish Fed expectations.

On the other hand, the ECB policymakers have been pushing back on market bets for tighter policy and talked down the need for any action to counter inflation. The divergence in the Fed-ECB monetary policy outlooks turned out to be another factor that drove flows away from the shared currency. That said, a combination of factors could cap the USD and help limit deeper losses for the EUR/USD pair.

Retreating US Treasury bond yields, along with the prevalent risk-on environment might hold back the USD bulls from placing aggressive bets. Investors might also prefer to wait on the sidelines ahead of the key central bank event risks – the highly-anticipated FOMC decision on Wednesday and the ECB meeting on Thursday. This, in turn, warrants some caution before positioning for any further losses.

Nevertheless, the bias remains tilted in favour of bearish trades and any attempted recovery might still be seen as a selling opportunity. The EUR/USD pair seems vulnerable to slide back to retest sub-1.1200 levels, or the YTD low touched on November 25 and remains at the mercy of the USD price dynamics amid absent relevant macro releases.

Technical levels to watch