Post-US CPI breakout through 1.0600 favours bulls, FOMC awaited

• EUR/USD jumps to a fresh multi-month top on Tuesday amid the post-US CPI USD sell-off.
• Bulls turn cautious and prefer to move to the sidelines ahead of the crucial FOMC decision.
• The fundamental backdrop supports prospects for further gains ahead of the ECB on Thursday.

The EUR/USD pair touched its highest level since late June on Tuesday and confirmed a bullish breakout through a nearly two-week-old trading range. The US Dollar weakened across the board in reaction to softer US consumer inflation figures, which, in turn, was seen as a key factor that provided a strong boost to the major. The US Bureau of Labor Statistics reported that the headline CPI rose a modest 0.1% in November, down from the 0.4% increase recorded in the previous month and missing expectations for a reading of 0.3%. Furthermore, the yearly rate decelerated from 7.7% to 7.1% in November and core CPI, which excludes food and energy prices, slowed to 6.0% YoY from 6.3% in October. The data reinforced expectations that the Fed will slow the pace of its rate-hiking cycle, which triggered a fresh leg down in the US Treasury bond yields and weighed heavily on the buck.

Meanwhile, the prospects for a less aggressive policy tightening by the US central bank, along with the optimism over the easing of COVID-19 curbs in China, boosted investors' confidence. This was evident from a generally positive tone around the equity markets, which was seen as another factor undermining the safe-haven greenback. That said, expectations that the Fed might lift interest rates more than recently projected kept the mood in check and held back traders from placing aggressive directional bets. This led to a modest USD recovery and capped the upside for the EUR/USD pair. Spot prices retreated over 40 pips from the overnight swing high, though held steady above the 1.0600 mark through the Asian session on Wednesday. The market focus remains glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later in the day.

The Fed is widely expected to deliver a relatively smaller 50 bps rate hike. Hence, investors will take cues from the accompanying policy statement and the so-called “dot plot” for clues about the Fed's rate hike path. This, in turn, will play a key role in driving the near-term USD price dynamics and provide some meaningful impetus to the EUR/USD pair ahead of the European Central Bank meeting on Thursday. Nevertheless, the fundamental backdrop seems tilted in favour of bullish traders, suggesting that any pullback could be seen as a buying opportunity and is more likely to remain limited.

Technical Outlook

From a technical perspective, the overnight sustained move and acceptance above the 1.0600 mark add credence to the recent breakout through the very important 200-day SMA. This, in turn, adds credence to the near-term positive outlook and supports prospects for additional gains. That said, RSI (14) on the daily chart has moved on the verge of breaking into the overbought territory and warrants some caution. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for a fresh leg up.

In the meantime, a corrective decline below the 1.0600 round figure could attract some buyers near the 1.0535 horizontal support. This, in turn, should help limit the downside near the 1.0500 psychological mark. A convincing break below the latter might prompt some technical selling and drag the EUR/USD pair further towards the 1.0450-1.0445 horizontal support. The next relevant support is pegged near the 1.0400 mark ahead of the 200 DMA, currently around the 1.0345 zone, which should act as a strong base for spot prices.

On the flip side, the overnight swing high, around the 1.0670-1.0675 region, now seems to have emerged as an immediate barrier. This is closely followed by the 1.0700 round-figure mark. Some follow-through buying will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move. The EUR/USD pair might then aim to surpass the 1.0730 intermediate hurdle and climb to the 1.0775-1.0785 supply zone.