EUR/USD sticks to modest recovery gains near mid-1.0400s, lacks follow-through

• EUR/USD staged a goodish bounce from near a one-month low touched earlier this Tuesday.
• The risk-on impulse, retreating US bond yields undermined the USD and extended support.
• Aggressive Fed rate hike bets should act as a tailwind for the USD and cap gains for the pair.

The EUR/USD pair showed some resilience below the 1.0400 mark and staged a goodish bounce from a near one-month low touched earlier this Tuesday. The pair built on its steady intraday ascent through the early European session and climbed to a fresh daily peak, around mid-1.0400s in the last hour.

A turnaround in the global risk sentiment - as depicted by a generally positive tone around the equity markets - held back traders from placing fresh bullish bets around the safe-haven US dollar. Apart from this, retreating US Treasury bond yields undermined the greenback, which, in turn, was seen as a key factor that assisted the EUR/USD pair to attract some buying.

Spot prices, for now, have snapped a three-day losing streak, though any further upside seems elusive. Market participants seem convinced that the Fed would tighten its monetary policy at a faster pace to combat soaring inflation, which rose to over a four-decade high in May. This should act as a tailwind for the US bond yields and the USD, which should cap the EUR/USD pair.

This makes it prudent to wait for strong follow-through buying before confirming that the recent slide from the post-ECB swing high, around the 1.0775 region, has run its course. Traders now look forward to the release of the German ZEW Economic Sentiment for some impetus ahead of the US Producer Price Index (PPI), due later during the early North American session.

The focus, however, will remain glued to the outcome of a two-day FOMC policy meeting, scheduled to be announced on Wednesday. The markets have been pricing in the possibility of at least one jumbo hike by the September meeting. Hence, a 75 bps rise would send shockwaves across asset classes, which should lift the USD and exert downward pressure on the EUR/USD pair.

Technical levels to watch