EUR/USD Outlook: Investors turn cautious as German elections loom

• The USD was back in demand on Friday and capped any meaningful upside for EUR/USD.
• A more hawkish Fed, surging US bond yields, a softer risk tone underpinned the greenback.
• The downside remains cushioned ahead of the crucial German federal elections on Sunday.

The EUR/USD pair struggled to capitalize on the previous day's solid rebound from one-month lows and witnessed a subdued/range-bound price action through the early European session on Friday. The emergence of fresh buying around the US dollar was seen as a key factor that acted as a headwind for the major. Uncertainty about potential risks from the debt crisis at China Evergrande Group kept a lid on the recent optimism. This, along with prospects for an early rate hike by the Fed, dampened investors' appetite for riskier assets and helped revive demand for the safe-haven greenback.

Meanwhile, the Fed on Wednesday indicated that it will likely begin rolling back the massive pandemic-era stimulus toward the end of this year and complete the process by mid-2022. Adding to this, the so-called dot plot revealed a growing inclination among policymakers to raise interest rates in 2022. The repricing of the likely timing of the monetary policy tightening by the Fed pushed the US Treasury bond yields higher. In fact, the yield on the benchmark 10-year government bond back above the 1.4% threshold for the first time since July on Thursday and further underpinned the USD.

The pair witnessed a modest pullback from the vicinity of weekly tops, around 1.1750-55 region, though the downside is more likely to remain cushioned. Investors might refrain from placing aggressive bets ahead of the German federal elections on Sunday. Hence, it will be prudent to wait for some follow-through selling before traders start positioning for the resumption of the recent decline from monthly tops, or levels just above the 1.1900 mark. Heading into the key event risk, traders might take cues from the Fed Chair Jerome Powell's scheduled speech later during the early North American session.

Short-term technical outlook

From a technical perspective, traders are likely to wait for a convincing break through the weekly trading range before placing fresh directional bets. A sustained move beyond the 1.1750-55 region might prompt some short-covering move and lift the pair to the 1.1800 mark. This is followed by resistance near the 1.1820-25 horizontal zone, above which the momentum could get extended and allow bulls to aim to conquer the 1.1900 round figure.

On the flip side, immediate support is pegged near the 1.1725-20 region ahead of the 1.1700 mark and monthly lows, around the 1.1685 region. Some follow-through selling below YTD lows, around the 1.1665 region will be seen as a fresh trigger for bearish traders and turn the pair vulnerable. The downward trajectory could then drag the pair further towards the 1.1600 round-figure mark.