EUR/USD sticks to modest gains below mid-1.0800s, upside potential seems limited

• EUR/USD moves away from over a two-month low and is supported by a modest USD downtick.
• Retreating US bond yields and a positive risk tone turn out to be key factors weighing on the buck.
• The fundamental backdrop warrants some caution for bulls and before positioning for further gains.

The EUR/USD pair gains some positive traction for the second straight day on Tuesday and recovers further from its lowest level since June 13, around the 1.0765 region touched last week. Spot prices trade around the 1.0835 area during the Asian session, up over 0.15% for the day, though the fundamental backdrop warrants some caution before positioning for any further appreciating move.

A further pullback in the US Treasury bond yields, along with a generally positive risk tone, drags the safe-haven US Dollar (USD) away from a nearly three-month top set last week, which, in turn, is seen acting as a tailwind for the EUR/USD pair. Adding to this, European Central Bank (ECB) President Christine Lagarde's hawkish remarks on Friday, saying that interest rates will need to stay high as long as necessary to slow still-high inflation, contributes to the bid tone surrounding the Euro.

That said, speculations have been mounting that the ECB will halt its rate-hiking cycle sooner rather than later, especially after the flash PMIs showed that business activity in the Euro Zone declined more than expected in August and revived recession fears. Adding to this, the possibility of more interest rate hikes by the Federal Reserve (Fed) should act as a tailwind for the US bond yields and limit the USD losses. This warrants caution before placing bullish bets around the EUR/USD pair.

It is worth recalling that Fed Chair Jerome Powell, during his scheduled speech at the Jackson Hole Symposium, said on Friday that inflation remains too high and that the central bank is ready to continue hiking rates to tame persistently high prices. Furthermore, a resilient US economy could force the Fed to stick to its hawkish stance. The expectations had pushed the yield on the benchmark 10-year US government bond to its highest level since November 2007 last week and favour the USD bulls.

The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the EUR/USD pair has bottomed out in the near term and positioning for any further gains. Market participants now look to the US economic docket, featuring the release of the Conference Board's Consumer Confidence Index and JOLTS Job Openings data, for short-term trading impetus later during the early North America this Tuesday.

Technical levels to watch