• EUR/USD witnessed some selling on Thursday and retreated further from one-week tops.
  • A modest USD strength was seen as a key factor exerting downward pressure on the pair.
  • The market focus will remain glued to the latest ECB policy decision and the US CPI report.

The EUR/USD pair regained positive traction on Wednesday and built on its recent bounce from the vicinity of the 1.2100 mark, or three-week lows. The ongoing decline in the US Treasury bond yields kept the US dollar bulls on the defensive, which, in turn, was seen as a key factor that provided a goodish lift to the major. In fact, the yield on the benchmark 10-year US government bond fell below the 1.50% threshold for the first time since May 7.

On the other hand, the shared currency was supported by rising optimism on a strong economic recovery in the Eurozone amid a pickup in the vaccination campaign. This, along with some cross-driven strength stemming from a sharp spike in the EUR/GBP led by fresh Brexit jitters, provided an additional boost. The momentum pushed the pair back above the 1.2200 mark, though a late rebound in the USD capped the upside, rather prompted some selling at higher levels.

The pair finally settled around 40 pips off one-week tops and extended the pullback through the Asian session on Thursday. The downtick could be attributed to some repositioning trade ahead of the European Central Bank (ECB) meeting and the release of the latest US consumer inflation figures. The ECB is widely expected to leave monetary policy settings unchanged. That said, a fresh round of staff projections and any signals about an imminent slowdown in the pace of the ECB's emergency bond-buying program might infuse some volatility around the euro.

From the US, the CPI report will be another piece of important macro data that would set the tone for the upcoming FOMC meeting on June 15-16. This, in turn, will play a key role in influencing the near-term USD price dynamics and assist investors to determine the next leg of a directional move for the pair. The headline CPI is expected to rise 4.7% YoY in May. A sharper-than-expected increase might fuel speculations that the Fed would begin tapering its bond purchases sooner rather than later, which should be enough to provide a goodish lift to the greenback.

Short-term technical outlook

From a technical perspective, the pair's inability to find acceptance above the 1.2200 mark warrants some caution for bullish traders. This makes it prudent to wait for some follow-through buying beyond the 1.2225-30 region before positioning for any further appreciating move. The pair might then surpass May monthly swing highs, around the 1.2265 region and aim to reclaim the 1.2300 mark. The momentum could further get extended back towards retesting YTD tops, around mid-1.2300s touched on January 6.

On the flip side, any subsequent decline from current levels is likely to find decent support near the 1.2125 horizontal level ahead of the 1.2100 mark. A convincing break below might turn the pair vulnerable. The next relevant support is pegged near the 1.2065-60 region before the pair eventually drops to challenge the key 1.2000 psychological mark. This is closely followed by the very important 200-day SMA, around the 1.1985-80 region, which if broken decisively will set the stage for some meaningful near-term downfall.

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