EUR/USD trims weekly gain as markets reprice odds of Fed rate hike

• EUR/USD pulls back from weekly highs as the dollar sees broad-based recovery. 
• Markets fear that additional US fiscal stimulus would bring Fed rate hikes forward.

EUR/USD is facing selling pressure, with investors pricing a possibility of an early Federal Reserve (Fed) rate hike.

The pair is currently trading at 1.1797, down over 80 pips from the high of 1.1881 reached Wednesday. Despite the pullback, the pair is still up 0.72% this week. 

Investors buy puts on eurodollar futures

According to Reuters, investors are betting that the price of eurodollar futures, which gauge short-term rate expectations, could fall as the Fed would have to raise rates as soon as 2023 if lawmakers in Washington approve more stimulus in the near term. 

"Investors have been buying options on eurodollar futures, and interest rate swaps to bet on higher rates and falling US Treasury debt prices," a Reuters article said.

The US bond prices are already falling, pushing yields higher and boosting the dollar's appeal. The 10-year yield clocked four-month highs above 0.85% during the overnight trade. 

And while repricing odds of may be premature, it could continue to power short covering in the US dollar, which has taken a beating since the March crash. 

As such, EUR/USD could extend losses while heading into the weekend - more so, as the European Central Bank is under pressure to deliver more easing due to Eurozone's negative inflation. 

The downside pressures, however, would ease if the Eurozone and German preliminary Manufacturing PMIs beat estimates. The data is due for release during Friday's European trading hours. 

Technical levels