• EUR/USD has gained traction following a quiet Asian session on Tuesday.
  • The pair could struggle to extend its recovery in the short term.
  • Investors might remain on the sidelines ahead of Wednesday's key data releases.

After having registered modest gains on Monday, EUR/USD has stretched higher in the early European session and climbed above 1.0200. Ahead of the inflation data from Germany and the US on Wednesday, however, market participants could refrain from betting on further euro strength.

Citing a study conducted by the Institute for Employment Research (IAB), Reuters reported earlier in the day that Germany's price-adjusted Gross Domestic Product is expected to be 1.7% lower in 2023 amid high energy prices and the war in Ukraine. The study also forecast that 240,000 fewer people in Germany will be employed in 2023. As of writing, Germany's DAX 30 Index was down 0.4% on the day, pointing to a cautious market mood.

In case risk flows start to dominate the markets, the shared currency could start erasing its daily gains. On Monday, EUR/USD retraced a portion of its daily rebound in the late American session when Wall Street's main indexes turned south, reflecting the pair's sensitivity to risk perception.

In the second half of the day, the US Labor Bureau of Labor Statistics is expected to report that the Unit Labor Costs in the second quarter declined to 9.5% from 12.6% in the first quarter. Nevertheless, this data is unlikely to influence the market pricing of the Fed's rate outlook in a significant way. According to the CME Group FedWatch Tool, there is now a 65% chance of the Fed raising the policy rate by 75 basis points. 

EUR/USD Technical Analysis

EUR/USD is closing in on 1.0230, where the Fibonacci 38.2% retracement of the latest downtrend is located. Even if the pair manages to rise above that level, it could meet strong resistance at 1.0250 (200-period SMA on the four-hour chart). Only a four-hour close above that level could be seen as a bullish development and open the door for an extended recovery toward 1.0300 (psychological level, Fibonacci 50% retracement).

On the downside, initial support is located at 1.0200 (100-period SMA, 50-period SMA). If sellers flip that level into resistance, 1.0150 (Fibonacci 23.6% retracement) and 1.0100 (psychological level, static level) could be seen as the next bearish targets. 

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