EUR/USD Analysis: Bears turn cautious ahead of ECB meeting on Thursday

• EUR/USD fell to seven-week lows on Monday, albeit lacked any strong follow-through.
• COVID-19 jitters benefitted the safe-haven USD and exerted some downward pressure.
• The underlying bullish sentiment assisted the pair to regain positive traction on Tuesday.

The EUR/USD pair remained depressed on the first day of a new trading week and fell to seven-week lows, albeit lacked any strong follow-through selling. Concerns about the coronavirus pandemic’s worsening impact on major economies continued weighing on investors' sentiment. This, in turn, benefitted the safe-haven US dollar and was seen as one of the key factors weighing on the major. The shared currency was further pressured by the Italian political crisis, wherein the government faces a Senate vote on Tuesday that will decide PM Conte’s fate.

However, relatively thin liquidity conditions on the back of a holiday in the US held traders from placing aggressive bets. Investors also seemed reluctant ahead of the latest ECB monetary policy decision on Thursday, which further collaborated to limit any meaningful slide. The pair managed to find decent support near mid-1.2200s and gained some positive traction during the Asian session on Tuesday. A positive trading sentiment around the equity markets undermined the safe-haven greenback and pushed the pair back to the 1.2100 round-figure mark.

The global risk sentiment remained well supported by expectations of additional US fiscal stimulus under Joe Biden’s presidency and the rollout of vaccines for the highly contagious coronavirus disease. That said, investors are likely to turn cautious ahead of the President-elect Joe Biden's inaugural ceremony on Wednesday and the ECB meeting on Thursday. In the meantime, Tuesday's release of ZEW economic sentiment figures for Germany and the Eurozone might provide some impetus. Apart from this, Treasury Secretary nominee Janet Yellen’s confirmation hearing will influence the USD price dynamics and contribute to produce some trading opportunities.

Short-term technical outlook

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias still seems tilted in favour of bearish traders. That said, the overnight resilience below the 38.2% Fibonacci level of November-January rally makes it prudent to wait for some follow-through selling before positioning for any further depreciating move. Meanwhile, any subsequent positive move is more likely to confront stiff resistance near the 1.2120-30 congestion zone. A sustained move beyond might trigger a short-covering move and push the pair back towards the 23.6% Fibo. level, around the 1.2170-75 region, en-route the 1.2200-1.2210 heavy supply zone.

On the flip side, the 1.2050 region now seems to act as immediate support, which if broken might then turn the pair vulnerable to accelerate the slide towards the key 1.2000 psychological mark. This is closely followed by the 50% Fibo. level, around the 1.1975 region. Failure to defend the mentioned support levels will be seen as a fresh trigger for bearish traders and set the stage for an extension of the ongoing corrective slide from multi-year tops set earlier this January.