EUR/USD Forecast: EU inflation data could cap euro's upside

EUR/USD has failed to build on Friday's gains and closed modestly lower on Monday. With the greenback struggling to find demand on Tuesday, the pair manages to stay in the positive territory above 1.1300. However, the preliminary November inflation data from the euro area could make it difficult for the pair to gather recovery momentum in case it reminds investors of the European Central Bank's dovish policy outlook.

The Eurostat is expected to report a decline to 1.9% in the euro area's annual Core Consumer Price Index (CPI) from 2% in October. Unless the Core CPI print beats the market expectation by a wide margin, the ECB is likely to stick to the narrative of "no hikes in 2022."

On the other hand, the risk-averse market environment is causing US Treasury bond yields to fall sharply on Tuesday and weighing on the greenback. The benchmark 10-year US T-bond yield was last seen losing nearly 3% on the day at 1.45%.

Later in the day, FOMC Chairman Jerome Powell will testify before the US Senate Committee on Banking, Housing, and Urban Affairs on coronavirus and CARES Act. According to Powell's prepared opening statement, the Fed expects factors driving inflation upward are expected to linger "well into next year."

Lawmakers will want to know if the Fed will continue to tighten its policy in the face of the new coronavirus variant. In case Powell refrains from saying that the new variant could change how they approach the policy, we could see the bond yields gain traction and the dollar gathering strength against its peers.

EUR/USD Technical Analysis

On the four-hour chart, EUR/USD is testing the static resistance near 1.1330 and the Relative Strength Index (RSI) indicator is staying below 70, suggesting that there is more room on the upside before the pair turns overbought.

On the upside, the next target is located at 1.1360 (100-period SMA). If buyers are able to flip that level into support, additional recovery gains toward 1.1400 (Fibonacci 50% retracement of the November downtrend, psychological level) could be witnessed.

Supports are located at 1.1300/1.1290 (psychological level, Fibonacci 23.6% retracement) and 1.1270 (50-period SMA, 20-period SMA).