EUR/USD corrects from multi-month peak, drops to 1.0600 mark ahead of ECB decision

• EUR/USD retreats from a multi-month high touched on Wednesday amid a goodish USD rebound.
• A hawkish assessment of the FOMC decision and the risk-off impulse benefit the safe-haven buck.
• The downside seems limited as traders keenly await the latest monetary policy update by the ECB.

The EUR/USD pair comes under heavy selling pressure on Thursday and snaps a two-day winning streak to the 1.0700 neighbourhood, or a six-month high touched the precious day. The pair extends its steady intraday descent through the first half of the European session and drops to a fresh daily low, around the 1.0600 mark in the last hour.

A combination of factors assists the US Dollar to stage a goodish recovery from its lowest level since mid-June, which, in turn, is seen exerting downward pressure on the EUR/USD pair. The US central bank on Wednesday signalled that it will continue to raise rates. Moreover, policymakers see the terminal rate rising to 5.1%, an additional 75 bps increases in borrowing costs by the end of 2023. This turns out to be a more hawkish communication than markets expected and offers some support to the greenback. Apart from this, a fresh wave of the global risk-aversion trade - as depicted by a sharp fall in the equity markets - provides an additional boost to the safe-haven buck.

Investors, however, expect the US central bank to pivot from an ultra-hawkish stance to something more neutral. This, in turn, keeps the US Treasury bond yields depressed, which might hold back the USD bulls from placing aggressive bets and lend some support to the EUR/USD pair. Traders might also prefer to wait on the sidelines ahead of the European Central Bank (ECB) decision, scheduled to be announced later this Thursday. The ECB is set to raise interest rates for the fourth time in a row, albeit at a slower pace than at the last two meetings. The current market pricing indicates a greater chance of a 50 bps lift-off amid signs of easing inflationary pressures.

Furthermore, investors will scrutinize ECB President Christine Lagarde's remarks at the post-meeting press conference, which will influence the shared currency. Apart from this, the US macro data - Retail Sales, the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims data and Industrial Production data - should provide some impetus to the EUR/USD pair. Nevertheless, it will still be prudent to wait for strong follow-through selling before confirming that spot prices have formed a near-term top and positioning for any meaningful corrective pullback.

Technical levels to watch