• The risk-on impulse undermined the safe-haven USD and extended some support to EUR/USD.
• The Fed’s hawkish outlook acted as a tailwind for the greenback and capped gains for the pair.
• Absent relevant economic releases warrant some caution before placing fresh directional bets.

The EUR/USD pair edged higher during the early European session and refreshed daily high in the last hour, with struggled to capitalize on the move or reclaim the 1.1300 mark.

Following a brief consolidation through the early part of the trading on Tuesday, the EUR/USD pair gained some traction for the second successive day amid subdued US dollar demand. A turnaround in the risk sentiment – as depicted by a generally positive tone around the equity markets – undermined the greenback's relative safe-haven status. This, in turn, was seen as a key factor that provided a modest lift to the major.

That said, the Fed's hawkish outlook, along with an uptick in the US Treasury bond yields acted as a tailwind for the greenback and cap any meaningful upside for the EUR/USD pair. It is worth recalling that the Fed last week announced that it would double the pace of tapering to $30 billion per month. Moreover, the dot plot indicated that officials expect to raise the fed funds rate at least three times next year.

Meanwhile, investors remain concerned about the potential economic fallout from the rapid spread of the Omicron variant of the coronavirus. Adding to this, a fatal blow to US President Joe Biden's massive $1.75 trillion social spendings and climate bill should keep a lid on a further optimistic move in the markets. This could further benefit the greenback's relative safe-haven status against its European counterpart.

Investors might also be reluctant to place aggressive bets amid relatively thin liquidity conditions heading into the end-of-year holiday season. This, in turn, warrants some caution for bullish traders or positioning for a firm near-term direction amid absent relevant market-moving economic releases, either from the Eurozone or the US.

Technical levels to watch