EUR/USD Outlook: Bears have the upper hand, could aim to retest sub-1.1200 levels

• EUR/USD met with a fresh supply on Monday amid renewed USD buying interest.
• Hawkish Fed expectations, rebounding US bond yields underpinned the greenback.
• The risk-on impulse could cap the safe-haven USD and help limit losses for the pair.

The EUR/USD pair witnessed some selling on the first day of a new week and remained on the defensive through the early European session. As investors' looked past Friday's mixed US NFP report, the USD was back in demand and remained well supported by the prospects for a faster policy tightening by the Fed. The headline NFP showed that the US economy added 210K jobs in November as against 550K anticipated. The disappointment, however, was offset by a sharp fall in the unemployment rate to 4.2% from 4.6% in October and did little to alter hawkish Fed expectations.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. In fact, the money markets indicate a high probability of the Fed liftoff by May 2022, which, in turn, continued acting as a tailwind for the buck. That said, the risk-on impulse in the markets might hold back traders from placing aggressive bullish bets around the safe-haven greenback. This, in turn, could help limit any deeper losses for the major amid absent relevant market-moving economic releases, either from the Eurozone or the US.

The global risk sentiment stabilized in the wake of reports, suggesting that Omicron patients only had relatively mild symptoms. This was evident from a positive tone around the equity markets, which tends to undermine demand for traditional safe-haven currencies, including the greenback. Nevertheless, the downtick – marking the third in the previous four sessions – suggests that the recent bounce from the lowest level since July 2020 has run its course. Moreover, the divergence in monetary policy stance between the European Central Bank (ECB) and the Fed validates the negative outlook.

Technical outlook

From a technical perspective, the pair last week faltered near the 38.2% Fibonacci level of the 1.1692-1.1186 downfall last week. A subsequent fall and acceptance below the 23.6% Fibo. level favours bearish traders. Some follow-through selling below Friday's swing low, around the 1.1265 area, will reaffirm the negative bias and turn the pair vulnerable to retest sub-1.1200 levels or the YTD low set on November 25. This is closely followed by the 1.1170-65 horizontal resistance breakpoint, now turned support, below which the pair could slide to the next relevant support near the 1.1145 area. The downward trajectory could further get extended towards the 1.1100 round-figure mark.

On the flip side, any attempted recovery back above the 1.1300 mark now seems to confront resistance near the post-NFP high, around the 1.1330-35 region. Some follow-through buying has the potential to lift the pair back towards the 1.1380-85 resistance zone (38.2% Fibo. level), which if cleared might trigger a short-covering move. The pair might then surpass the 1.1400 mark and accelerate the momentum towards the 50% Fibo. level, around the 1.1440 area.