EUR/USD Analysis: Weighed down by ECB, risk-off mood; focus shifts to US Q4 GDP

• EUR/USD witnessed heavy selling on Thursday and dropped to over one-week lows.
• Comments by ECB’s Knot weighed on the euro and led to the initial leg of the decline.
• A turnaround in the risk sentiment underpinned the USD and added to the selling bias.
• Dovish Fed helped limit the downside as the focus now shifts to the US Q4 GDP report.

A combination of factors prompted some heavy selling around the EUR/USD pair and dragged it to one-and-half-week lows on Wednesday. The shared currency started losing ground after the ECB Governing Council member Klaas Knot said that the exchange rate would take prominence if it threatens inflation outlook. Knot added that the ECB is keeping a watchful eye on the euro strength and that the central bank has tools to counter any further appreciation. Knot also hinted that the ECB could decide to cut interest rates further to curb the common currency's recent gains and keep inflation target in sight.

Meanwhile, the German government slashed its 2021 growth forecast to 3% from its previous projection of 4.4%. This added to worries about the potential economic fallout from the second round of coronavirus lockdown and further undermined the shared currency. Apart from this, a selloff in the US equity markets provided a strong lift to the safe-haven US dollar and further contributed to the pair's intraday decline. There was no obvious trigger for the rout, though doubts about the timing and size of the new US economic stimulus package turned out to be a key factor that dampened the market mood.

On the economic data front, the US Durable Goods Orders came in to show a modest 0.2% rise in December as against 0.9% anticipated. The disappointing print, to a larger extent, was offset by an upward revision of the previous month's reading and better-than-expected core durable goods orders (excluding transportation items), which increased by 0.7% during the reported month vs 0.5% expected. The data did little to derail the intraday USD positive move. The pair, however, managed to find some support ahead of the monthly swing lows, around mid-1.2000s, after the Fed announced its policy decision.

As widely anticipated, the FOMC left its monetary policy settings unchanged and downplayed speculations of tapering bond purchases sooner than expected. The US central bank, however, raised concerns about the pace of recovery and said that the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the outlook. Hence, the focus now shifts to Thursday's release of the Advance US Q4 GDP report. Ahead of the key release, the pair was seen trading with a negative bias, below the 1.2100 mark during the Asian session.

Short-term technical outlook

From a technical perspective, repeated failures ahead of the 1.2200 round-figure mark could be seen as the first signs of possible bullish exhaustion. A subsequent slide below the 1.2055-50 region will add credence to the negative outlook and drag the pair further towards the key 1.2000 psychological mark. Some follow-through selling below the 1.1980-75 region will be seen as a fresh trigger for bearish traders and set the stage for an extension of the recent corrective fall from near three-year tops touched earlier this month.

On the flip side, the 1.2135 horizontal level now seems to act as immediate resistance. A sustained move beyond might assist bulls to make a fresh attempt to make it through the 1.2190-1.2200 heavy supply zone. The next relevant target on the upside is pegged near the 1.2240 region, above which the momentum could push the pair back towards the 1.2300 round-figure mark.