EUR/USD Analysis: Weakens of dismal German data, downside seems limited ahead of FOMC

The EUR/USD pair witnessed some selling on the first day of a new trading week and erased a major part of its gains recorded over the past two trading sessions. The shared currency started losing ground following the disappointing release of the German IFO Business Climate Index, which dropped to a 6-month low level of 90.1 in January. Adding to this, the IFO Current Assessment and Expectations Index fell to 89.2 and 91.1, respectively, both missing consensus estimates.

The data added to worries that the current round of strict coronavirus restrictions could lead to a double-dip recession in the European economies and dampened the market mood. Apart from this, lingering concerns about potential roadblocks to US President Joe Biden's $1.9 trillion stimulus plan further took its toll on the global risk sentiment. The lower risk appetite benefitted the safe-haven US dollar and further contributed to the pair's intraday slide.

Despite the negative factors, the downside remains cushioned as investors seemed reluctant to place aggressive bets, rather preferred to wait on the sidelines ahead of this week's key event/data risk. The FOMC will announce its policy decision on Wednesday. This will be followed by the release of the Advance Q4 US GDP report on Thursday. This, along with the US stimulus headlines, will influence the USD price dynamics and provide a fresh directional impetus to the major.

In the meantime, the focus will be on the timing and size of the US fiscal stimulus. Apart from this, developments surrounding the coronavirus saga will influence the broader market risk sentiment and the safe-haven USD. This, in turn, will be looked upon for some trading opportunities amid absent market-moving data from the Eurozone. The US economic docket highlights the release of the Conference Board's Consumer Confidence Index, though is unlikely to be a major game-changer.

Short-term technical outlook

From a technical perspective, the pair's repeated failures ahead of the 1.2200 round-figure mark could be seen as the first sign of bullish exhaustion. That said, investors might still wait for some follow-through selling below the 1.2080-75 horizontal support before positioning for any meaningful downside. The pair might then accelerate the fall towards the key 1.2000 psychological mark before eventually dropping to test the 1.1965-60 horizontal resistance breakpoint.

On the flip side, attempted positive moves might continue to confront stiff resistance near the 1.2190-1.2200 region. This is closely followed by the 1.2220-25 supply zone, which if cleared decisively will negate any near-term bearish bias. The subsequent strength has the potential to push the pair further beyond the 1.2270-75 intermediate hurdle, back towards reclaiming the 1.2300 round-figure mark en-route multi-year tops, around mid-1.2300s.