EUR/USD clings to modest intraday gains above 1.1300 mark, upside remains capped

• EUR/USD attracted some buying on Tuesday and rallied over 50 pips from the daily low.
• The USD witnessed some profit-taking and provided a modest intraday push to the pair.
• Divergent ECB-Fed policy outlooks should cap gains ahead of the central bank meetings.

The EUR/USD pair rallied nearly 60 pips from the early European session low and was last seen trading around the 1.1320 region, up 0.35% for the day.

Reports that two doses of Pfizer-BioNTech vaccine give 70% protection against the Omicron variant prompted some selling around the safe-haven US dollar. This was seen as a key factor that assisted the EUR/USD pair to reverse an intraday dip to the 1.1265 region. That said, the prevalent cautious market mood, along with hawkish Fed expectations should help limit any deeper USD losses and cap any further gains for the major.

Investors remain concerned about the potential economic fallout from the spread of the new variant and the imposition of fresh restrictions in Europe and Asia. This, in turn, should keep a lid on any optimistic move in the financial markets. Apart from this, the prospects for an early policy tightening by the Fed should act as a tailwind for the greenback and keep a lid on any meaningful upside for the EUR/USD pair.

In fact, the money markets indicate the possibility for an eventual liftoff by June 2022 and another rate hike as early as November. Conversely, the European Central Bank (ECB) has been pushing back against bets for a tighter policy and talked down the need for any action to counter inflation. The divergence in the Fed and ECB monetary policy outlooks should further hold back traders from placing bullish bets around the EUR/USD pair.

Moreover, investors might also prefer to wait on the sidelines ahead of this week's key central bank event risks. The Fed will announce its monetary policy decision on Wednesday and the ECB meeting is scheduled on Thursday. This further makes it prudent to wait for a strong follow-through buying before traders start positioning for any meaningful appreciating move for the EUR/USD pair.

Technical levels to watch