EUR/USD jumps to fresh daily top around 1.1335 area, upside potential seems limited

• EUR/USD staged a goodish intraday bounce from the Asian session low, near the 1.1300 mark.
• Declining US bond yields kept the USD bulls on the defensive and acted as a tailwind for the pair.
• The risk-off mood, Fed rate hike bets should underpin the USD and keep a lid on any strong gains.

The EUR/USD pair quickly reversed an Asian session dip to a near two-week low and shot to a fresh daily high, around the 1.1335 region in the last hour.

The pair attracted some dip-buying near the 1.1300 mark on Friday and has now reversed a major part of the overnight losses, though any meaningful upside still seems elusive. The ongoing sharp retracement slide in the US Treasury bond yields undermined the US dollar, which, in turn, was seen as a key factor that provided a goodish lift to the EUR/USD pair.

That said, the prospects for an early policy tightening by the Fed, along with the prevalent risk-off environment should lend some support to the safe-haven USD and cap gains for the EUR/USD pair. In fact, the money markets have fully priced in an eventual Fed lift-off in March and a total of four hikes in 2022 amid worries about stubbornly high inflation.

Meanwhile, concerns that rising borrowing costs could dent the earnings outlook for companies tempered investors' appetite for perceived riskier assets. This was evident from the recent corrective pullback in the equity markets, which, along with the divergent Fed-ECB policy outlook, should keep a lid on any runaway rally for the EUR/USD pair, at least for now.

Investors might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the upcoming FOMC monetary policy meeting on January 25-26. The outcome will be looked upon for clearer signals about the likely timing when the Fed will commence the rate hike cycle, which will provide a fresh directional impetus to the buck and the EUR/USD pair.

The fundamental backdrop warrants caution before confirming that the recent corrective pullback from the 1.1480 region has run its course and positioning for any appreciating move for the EUR/USD pair. In the absence of any major market-moving economic releases, ECB President Christine Lagarde's speech will be looked upon for some short-term trading opportunities.

Technical levels to watch