EUR/USD treads water near multi-year highs, stays below 1.23

• EUR/USD extends gains on Monday.
• DXY finds support ahead of 90.
• Volume is set to decline in the second half of the day.

The EUR/USD pair was able to build on last week's gains at the start of the week but lost its bullish momentum ahead of 1.23. As of writing, the pair is trading at 1.2274, adding 75 pips, or 0.63%, on the day.

After making its fifth straight positive weekly close last Friday, the pair continued to take advantage of the broad-based selling pressure witnessed on the USD on Monday. The US Dollar Index was last seen moving sideways a little above the 3-year low that it set at 90.05 earlier in the session. Moreover, with the political uncertainties in Germany fading away on news of the CDU/CSU and the SPD kicking off the formal talks to form the new government, the shared currency remains in the spotlight of the FX investors.

"Even after breaking yet another multi-year high, we see EUR/USD as still undervalued - by around 1-2% based on our short-term fair value model. This points to a benign outlook for the cross, with a fairly limited downside risk. Strong EUR translate into a sweet-spot for CEE currencies," ING economists argued in a recent report.

With the US with banks closed in observance of Martin Luther King Day, the pair is likely to move sideways in its recent range below the 1.23 mark.

Technical outlook

Valeria Bednarik, American Chief Analyst at FXStreet, writes,  "the risk of a downward corrective movement is high, but at the time being, there are no technical signs indicating that such decline could take place. Friday's high at 1.1220 should be considered an immediate short-term support, and a break below should b the first warning of upcoming downward pressure, to be confirmed by a break of 1.2200 that could result in a slide toward the 1.2140/60 price zone."