EUR/USD flirts with weekly top, around 1.1340 area amid subdued trading action

• EUR/USD gained some positive traction on Friday and moved back to the weekly high.
• The risk-on mood continued underpinning the safe-haven USD and extended support.
• The Fed’s hawkish outlook should limit the USD losses and cap the upside for the pair.

The EUR/USD pair edged higher through the first half of the European session and was last seen hovering near the weekly high, just below mid-1.1300s.

The pair gained some positive traction on the last day of the week and is now looking to build on this week's goodish bounce from the 1.1235 region touched on Monday. The prevalent risk-on environment continued acting as a headwind for the safe-haven US dollar, which, in turn, was seen as a key factor that provided a modest lift to the EUR/USD pair.

The latest optimism led by reports that the Omicron variant might be less severe than feared remained supportive of the underlying bullish sentiment in the financial markets. Adding to this, various studies indicated that Omicron infections are less likely to lead to hospitalization and severe disease, which further boosted investors' confidence.

That said, the year-end thin liquidity conditions held back traders from placing aggressive directional bets. This, along with the Fed's hawkish outlook, should help limit any meaningful USD losses and cap the upside for the EUR/USD pair. This, in turn, warrants some caution before positioning for any further appreciating move for the major.

It is worth recalling that the so-called dot plot indicated that the Fed could hike rates at least three times next year. The expectations were reaffirmed by the US Personal Consumption Expenditures (PCE) Price Index, which accelerated to 5.7% YoY in November. This marked the largest annual growth since 1982 and validated expectations for an eventual Fed liftoff.

The fundamental backdrop seems tilted in favour of the USD bulls. Even from a technical perspective, the EUR/USD pair has been oscillating in a familiar trading range since the beginning of this month. This further makes it prudent to wait for a strong follow-through buying before confirming that the pair might have already formed a near-term bottom.

Technical levels to watch