EUR/USD Remains On The Defensive Below The Mid-1.0700s And Awaits The German ZEW Survey For Direction

During Tuesday's Asian session, the EUR/USD pair trades with a mildly negative bias, unable to capitalise on the overnight strong rise up to a four-day high. Spot prices are currently below the mid-1.0700s and remain within striking distance of last week's three-month low.

The US Dollar (USD) stabilises after a sharp decline on Monday and for now, seems to have stalled its retracement slide from the highest level since March, which, in turn, is seen as a key factor acting as a headwind for the EUR/USD pair. The likelihood of additional policy tightening by the Federal Reserve (Fed) continues to support elevated US Treasury bond yields, which, combined with the cautious market sentiment, provides some support for the safe-haven Greenback.

Notably, the markets continue to price in the possibility of one more 25-bps rate hike by the Fed by the end of this year. Moreover, the optimistic macroeconomic data published last week in the United States pointed to a robust economy and should allow the Fed to maintain higher interest rates for longer. This, in turn, exacerbates worries about economic headwinds caused by swiftly rising borrowing costs and continues to dampen optimism in the equity markets.

On the other hand, the uncertainty surrounding the European Central Bank's (ECB) prospective rate-hike path weakens the shared currency. In actuality, market participants remain divided over whether the ECB will raise interest rates for a tenth consecutive time in the face of persistently high inflation or halt its historic policy-tightening cycle in response to a deteriorating Euro Zone economic outlook. This further contributes to limiting the EUR/USD's upside, at least for the time being.

Traders anticipate the German ZEW Economic Sentiment report to provide a boost during the European session. The EUR/USD pair's near-term trajectory will be heavily influenced by the release of crucial US consumer inflation data on Wednesday and the ECB meeting on Thursday. The aforementioned fundamental environment necessitates caution before placing aggressive direction wagers.