EUR/USD seems vulnerable near multi-month low, just above mid-1.1200s

• EUR/USD languished near a 16-month low and was weighed down by a combination of factors.
• Hawkish Fed expectations continued underpinning the greenback amid fresh COVID-19 jitters.
• Oversold RSI held bearish traders from placing fresh bets, though any recovery seems elusive.

The EUR/USD pair remained on the defensive through the Asian session and was last seen trading around the 1.1270-65 region, just a few pips above a 16-month low touched on Friday.

A combination of factors continued weighing on the pair through the early part of the action on the first day of the week, albeit oversold conditions held back traders from placing fresh bearish bets. The US dollar remained well supported by the prospects for an early policy tightening by the Fed and was further boosted by fresh COVID-19 jitters.

Investors seem convinced that the US central bank would be forced to adopt a more aggressive policy response to contain stubbornly high inflationary pressures. The speculations were further fueled by comments from Fed Governor Christopher Waller, saying that the US central bank should speed up the pace of tapering to give more leeway to raise interest rates.

Meanwhile, Austria said it would be the first country in Western Europe to reimpose a full lockdown amid surging infections and Germany could follow suit. This further benefitted the greenback's relative safe-haven status and acted as a headwind for the shared currency, which was also undermined by the fact that the ECB has been pushing back on market bets for tighter policy.

That said, RSI (14) has already fallen below the 30 mark and point to extremely overstretched conditions on the daily chart. This, in turn, was seen as the only factor that helped limit any further losses, at least for now. In the absence of any major market-moving economic releases on Monday, the EUR/USD pair remains at the mercy of the USD price dynamics.

Technical levels to watch