EUR/USD Outlook: Turns bullish in short-term amid hawkish ECB, weaker USD

The EUR/USD pair attracts some dip-buying near the 1.0060 area on Monday and shot to a more than three-week peak, bolstered by a combination of factors. Rising bets for a more aggressive policy tightening by the European Central Bank continue to act as a tailwind for the shared currency. Over the weekend, European Central Bank (ECB) Executive Board member Frank Elderson said that more interest hikes from the central bank will be in the offing. Adding to this, Bundesbank President and ECB  Governing Council member Joachim Nagel told German radio that if the picture for consumer prices doesn't change further clear steps must follow. Apart from this, the heavily offered tone surrounding the US dollar provides an additional lift to the major and contributes to the ongoing recovery from the lowest level since October 2002.

The markets already seem to have fully priced in a supersized 75 bps rate hike at the next FOMC policy meeting on September 20-21. This, along with retreating US Treasury bond yields and a positive risk tone, drags the safe-haven greenback away from a two-decade high touched last week. That said, growing recession fears, amid the prospects for a faster policy tightening by major central banks and economic headwinds stemming from fresh COVID-19 curbs in China, could cap optimism. This could help limit the downside for the buck. Apart from this, worries that a full-blown energy crisis in Europe keeps a lid on any further gains for the EUR/USD pair. Spot prices, for now, seem to have faced rejection near the 1.0200 round-figure mark, which should act as a pivotal point ahead of the latest US consumer inflation figures on Tuesday.

The crucial US CPI report will play a key role in influencing the Fed's policy outlook and dictate the near-term USD trend. This, in turn, will help investors to determine the next leg of a directional move for the EUR/USD pair. In the meantime, the USD remains at the mercy of the US bond yields the broader risk sentiment amid absent relevant market moving economic releases from the US on Monday. Apart from this, traders will take cues from fresh developments surrounding the Russia-Ukraine war to grab short-term opportunities.

Technical Outlook

From a technical perspective, acceptance above the 50% Fibonacci retracement level of the August-September downfall might have already set the stage for additional gains. Sustained strength above the 61.8% Fibo. level, leading to a subsequent move beyond the 1.0200 round figure will reaffirm the positive bias. The EUR/USD pair might then climb the next relevant hurdle near the 1.0265-1.0275 supply zone. The momentum could further get extended towards the 1.0300 mark en route to the August monthly swing high, around the 1.0365-1.0370 region.

On the flip side, the 1.0100 round figure now seems to protect the immediate downside ahead of the daily low, around the 1.0060 area. The latter coincides with the 38.2% Fibo. level, which if broken could drag the EUR/USD pair back towards the parity mark. The decline, however, might still be seen as a buying opportunity and remain limited. That said, a convincing break below could make spot prices vulnerable to testing the 0.9940-0.9930 support zone before dropping to the 0.9900 mark. The next relevant support is pegged near the 0.9865 zone, or a two-decade low touched last week.