EUR/USD Forecast: Euro rejected from 1.0700 as focus turns to the Fed

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  • The Euro lost momentum during the American session amid higher yields.
  • Attention is focused on the Federal Reserve and Powell.
  • The upside correction of EUR/USD from monthly lows loses momentum.

The EUR/USD declined modestly on Tuesday after being unable to hold onto gains above 1.0700. The pair peaked at 1.0717, reaching the highest level since last Thursday. The US Dollar strengthened later in the day amid a deterioration in market sentiment and higher US yields ahead of the Federal Reserve (Fed) decision.

The final reading of the Eurozone Harmonized Index of Consumer Price Index showed a revision in the annual rate from 5.3% in August to 5.2%, while the Core rate remained at 5.3%. On Wednesday, Germany will release the August Producer Price Index, and Eurostat will publish July Construction Output. The UK will release inflation data.

The economic numbers will likely be overshadowed by the FOMC decision. The Fed is expected to keep the Fed Fund rate steady at 5.25-5.50%. The statement and Chair Powell will likely reiterate that more tightening may be needed if inflation rebounds further or proves to be more resilient. The economy, so far, has shown resilience in the face of monetary tightening.

The outcome of the FOMC meeting will likely have a significant impact on the market and could be a determining factor for the direction of the US Dollar. The rally of the US Dollar Index (DXY) stalled on Monday; however, there have been no significant corrections, and the bias remains to the upside. Market participants will likely remain on the sidelines ahead of the decision. 

EUR/USD short-term technical outlook

The EUR/USD remains within a downtrend channel on the daily chart, well below key simple moving averages (SMA). Technical indicators offer mixed signals. A daily close above the 20-day SMA at 1.0760 would improve the outlook for the Euro.

On the 4-hour chart, the price is above the 20-SMA located at 1.0670. Around that level, there is also a significant support zone. A slide below it would indicate further weakening, potentially towards the 1.0650 area. A break below the monthly low at 1.0630 could trigger an acceleration of the downward move in the EUR/USD. The subsequent relevant support level is around 1.0600, which is expected to act as a downside barrier, limiting further declines.

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