EUR/USD inches closer to weekly high, around 1.1315-20 region ahead of ECB

The EUR/USD pair maintained its bid tone through the first half of the European session and was last seen trading around the 1.1315-20 region, just a few pips below the weekly high.

The US dollar extended the previous day's post-FOMC retracement slide from the vicinity of a 16-month top and witnessed some follow-through selling on Thursday. This, in turn, allowed the EUR/USD pair to gain traction for the second successive day and recover further from the monthly low, around the 1.1220 region touched on Wednesday.

The prevalent risk-on mood – as depicted by a generally positive tone around the equity markets – was seen as a key factor that undermined the greenback's relative safe-haven status. That said, concerns about the rapid spread of the Omicron variant, along with a more hawkish Fed should help limit any deeper losses for the USD.

It is worth recalling that the Fed on Wednesday announced that it would double the pace of tapering to $30 billion per month. Moreover, the so-called dot plot showed that officials expect to raise the fed funds rate at least three times next year. This, in turn, supports prospects for the emergence of some dip-buying around the USD.

Conversely, the European Central Bank (ECB) has made every effort to push back on bets for tighter policy and talked down the need for any action to counter inflation. The ECB-Fed monetary policy divergence might hold back traders from placing aggressive bullish bets around the shared currency and cap gains for the EUR/USD pair.

On the economic data front, the mixed release of the flash Eurozone PMI prints for December did little to provide any impetus or hinder the intraday move up. The market focus remains glued to the latest ECB monetary policy decision, due later this Thursday, which should infuse volatility and provide some impetus to the EUR/USD pair.

Technical levels to watch