EUR/USD held within a range below the psychological 1.1800 handle in European trading on Tuesday as investors await guidance from the Federal Reserve, which is scheduled to meet on Wednesday. With several risk events this week, a breakout appears to be inevitable, while a technical pattern favors a break to the upside.
The currency pair broke higher from an inverse head-and-shoulders pattern late last week that projects a measured move target near 1.2150. Thus far, buyers have firmly protected the neckline of the pattern, but naturally, bulls have been hesitant to follow through ahead of several risk events this week.
On Wednesday, the Federal Reserve is widely expected to announce an interest rate hike. The move has been priced in, and fluctuations in the greenback will be largely dependent on forward guidance. Policy makers will be sharing their latest thoughts on the economy and updating the dot plot into 2021.
In addition to the central bank meeting, the markets will also be sensitive to ongoing trade discussions. Market participants have been familiar with the ongoing impacts of headline news related to talks between China and the United States – however, NAFTA negotiations have once again come into the spotlight. U.S. officials are looking to finalize an agreement by the end of the month, which is less than one week from today. The concern seems to be with Canada, as U.S. officials have stated that concessions were not being made to push a deal through. There is a possibility of a bilateral agreement between the U.S. and Mexico if an agreement cannot be made with Canada prior to the deadline.
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In terms of economic data, euro area inflation data will be released on Friday. European Central Bank (ECB) President Mario Draghi triggered a surge of buying in EUR/USD earlier in the week after he stated that he saw a "relatively vigorous" pickup in underlying inflation in the euro area. Draghi's comments hint of a strong CPI report, and the extent of strength will ultimately determine the reaction in EUR/USD, as a boost in inflation raises the odds of the ECB following through with intentions to start raising rates next summer.
In addition to the technical pattern in EUR/USD, the dollar has been distinctly weak, and in September thus far, the U.S. currency has fallen against all of its major counterparts with the exception of the Japanese yen. On the other side, the euro has in the same time frame gained versus all its major counterparts with the exception of the British pound. EUR/USD reached a low of 1.1300 in August and has recovered nearly 500 pips since then, with relatively small retracements. This type of price action suggests that long-term bears are not rushing in to sell into what still appears to be a downtrend from highs posted in the early year.
Similar to the exchange rate, the inversely correlated U.S. dollar index (DXY) is also seen falling into a range in the early week. Downside support at 93.87 held DXY higher on a sharp fall last Friday, and bulls have defended the level on several attempts since. Near-term upside resistance at 94.35 was prior support and has been capping rallies. Support at 93.87 roughly equates to 1.1800 in EUR/USD.
Further horizontal resistance in the exchange rate is found at 1.1838, as the level held the pair lower on a correction in June. Ahead of the inverse head and shoulders measured move target, a declining trendline from this year's high comes into place, currently found near the psychological 1.2000 handle. To the downside, support is found at 1.1714, which reflects a horizontal level that is within close proximity of the neckline from the technical pattern. A sustained drop below it is likely to trigger some stops from traders playing the pattern.