EUR/USD remains on the defensive amid modest USD strength, downside seems cushioned

• EUR/USD lacks any firm intraday direction and oscillates in a range through the Asian session.
• A goodish pickup in the US bond yields underpins the USD and acts as a headwind for the pair.
• The ECB’s hawkish outlook lends some support to the Euro and helps limit any meaningful slide.

The EUR/USD pair struggles to gain any meaningful traction on Tuesday and oscillates in a narrow trading band, just above the 1.0900 round-figure mark through the Asian session.

The US Dollar (USD) builds on its recent bounce from over a one-month low touched last Friday and edges higher for the third successive day, which, in turn, is seen as a key factor acting as a headwind for the EUR/USD pair. The Federal Reserve (Fed), though skipped a rate hike last week, signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. The markets were quick to react and are now pricing in another 25-bps lift-off at the July FOMC meeting, which, in turn, triggers a fresh leg up in the US bond yields and lends some support to the buck.

Apart from this, a generally weaker tone around the equity markets further benefits the Greenback's relative safe-haven status and contributes to capping the upside for the EUR/USD pair. Concerns about a global economic downturn, particularly in China, overshadow reports that China is considering a broad stimulus package to bolster economic support and continues to weigh on investors' sentiment. Even a move by the People's Bank of China, to cuts one-year and five-year Loan Prime Rates (LPRs) this Tuesday, does little to ease concerns or provide any meaningful impetus to the major.

The downside for the EUR/USD pair, however, seems cushioned, at least for the time being, in the wake of the European Central Bank's (ECB) hawkish outlook. It is worth recalling that the ECB hiked interest rates for the eighth straight time last Wednesday, to the highest in 22 years and indicated that additional rate hikes will be needed to bring Eurozone inflation to its medium-term target of 2%. The inflation projection for this year was raised to 5.1% from 4.6%, suggesting that the central bank is still not done with its policy tightening. This, in turn, could offer support to the shared currency.

Traders also seem reluctant to place aggressive bets and might prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's two-day congressional testimony starting this Wednesday. Apart from this, comments by a slew of influential FOMC members will be looked upon for fresh cues about the Fed's future rate-hike path, which will play a key role in driving the USD demand and help determine the near-term trajectory for the EUR/USD pair. Investors this week will also confront the release of the flash PMI prints from the Eurozone and the US, due on Friday.