EUR/USD remains on the defensive below 1.1300 mark, seems vulnerable to slide further

• EUR/USD struggled to gain any meaningful traction and was pressured by a modest USD strength.
• The ECB-Fed policy divergence was seen as another factor that acted as a headwind for the major.
• The downside seems limited as traders seemed reluctant ahead of the key central bank event risks.

The EUR/USD pair remained on the defensive through the early European session and was last seen trading around the 1.1275-70 region, just a few pips above the overnight swing low.

The US dollar stood tall near a one-week high amid firming expectations that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation. Apart from this, fresh concerns about the economic risks emerging from the spread of the Omicron variant of the coronavirus further benefitted the greenback's safe-haven status.

Conversely, a more dovish stance adopted by the European Central Bank (ECB) undermined the shared currency and exerted some pressure on the EUR/USD pair. In fact, the ECB policymakers have talked down the need for any action to counter inflation. The divergence in monetary policy outlooks between the Fed and the ECB acted as a headwind for the EUR/USD pair.

The downside, however, remains cushioned, at least for the time being, as investors preferred to wait on the sidelines ahead of the key central bank event risks. The Fed will announce its monetary policy decision on Wednesday and the ECB meeting is scheduled on Thursday. The outcome will determine the next leg of a directional move for the EUR/USD pair.

In the meantime, traders might take cues from the release of the Eurozone Industrial Production data, which will be followed by the US Producer Price Index later during the early North American session. Apart from this, the broader market risk sentiment will influence the USD price dynamics and produce some trading opportunities around the EUR/USD pair.

Technical levels to watch