EUR/USD Analysis: Bulls turn cautious near 61.8% Fibo., this week’s key inflation data awaited

The EUR/USD pair retreats a few pips after testing its highest level since August 11, around the 1.0965 area this Tuesday and trades with a mild negative bias during the early European session. The US Dollar (USD) stages a modest recovery from a near three-month low amid an uptick in the US Treasury bond yields and is seen as a key factor exerting pressure on the major. Spot prices, for now, seem to have snapped a three-day winning streak, though the fundamental backdrop seems tilted in favour of bullish traders and supports prospects for the emergence of some dip-buying at lower levels.

The softer US consumer inflation figures released two weeks ago convinced market participants that the Federal Reserve (Fed) is done raising interest rates. Moreover, the current market pricing indicates a small possibility that the US central bank may begin easing its monetary policy as early as March 2024. This should cap the upside for the US bond yields and the USD. Moreover, ECB President Christine Lagarde's comments at a hearing in the European Parliament on Monday suggested that the bank is preparing to further tighten its monetary policy and should limit losses for the EUR/USD pair.

Lagarde reiterated that the fight to contain price growth is not yet done and that the ECB is likely to discuss speeding up the shrinkage of its balance sheet by ending the last of its bond purchases earlier than planned. She added that wage growth is still rapid and the economy will strengthen in the coming years, forcing investors to scale back expectations that the next move by the central bank will be a rate cut and validate the near-term positive outlook for the EUR/USD pair. Bulls, however, seem reluctant to place aggressive bets ahead of this week's key inflation figures from the Eurozone and the US.

The preliminary German and Spanish consumer inflation figures are due for release on Wednesday. This will be followed by the flash Eurozone CPI report and the US Core PCE Price Index – the Fed's preferred inflation gauge – on Thursday. Investors this week will also confront the release of the prelim or the second estimate of the US Q3 GDP print. Any signs of a resilient US economy and (or) reviving inflationary pressures could offer the Fed more headroom to keep rates higher for longer. That said, indications that the economy and inflation are cooling faster than expected will reaffirm dovish Fed expectations.

In the meantime, traders on Tuesday will take cues from the release of the Conference Board's US Consumer Confidence Index. This, along with speeches by a slew of influential FOMC members, will play a key role in driving the USD demand and provide some impetus to the EUR/USD pair.

Technical Outlook

From a technical perspective, the EUR/USD pair continues with its struggle to make it through the 61.8% Fibonacci retracement level of the July-October downfall. Moreover, the Relative Strength Index (RSI) on the daily chart is on the verge of breaking into overbought territory and warrants some caution for bullish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.

Meanwhile, any subsequent slide is likely to find some support near the overnight swing low, around the 1.0925 region. This is followed by the 1.0900 mark, below which the EUR/USD pair could drop back towards resting the 50% Fibo. level, around the 1.0860 region. Some follow-through selling might expose the 1.0770-1.0765 confluence, comprising the 100-day Simple Moving Average (SMA) and the 38.2% Fibo. level.

On the flip side, bulls need to wait for sustained strength and acceptance above the 61.8% Fibo. level, around the 1.0960-1.0965 region, before placing fresh bets. The EUR/USD pair might then accelerate the momentum towards reclaiming the 1.1000 psychological mark and climb further towards testing the next relevant hurdle near the 1.1030-1.1035 zone en route to the August swing high, around the 1.1065 area.