EUR/USD: On defensive above 1.2100, Fed’s Jerome Powell eyed

• EUR/USD fades bounce off intraday low, snaps two-day uptrend.
• Sluggish markets prevail ahead of the key FOMC, West versus China, covid adds filters to the moves.
• Treasury yields, DXY print mild gains following mixed US data.
• ECB’s De Guindos, US housing data will offer intermediate clues, Fed’s dot-plot, Powell’s speech will be eyed amid status-quo expectations.

EUR/USD retreats above 1.2100, marking the first daily loss in three, heading into Wednesday’s European session. That said, the currency pair struggles to keep the bounce off the intraday low at around 1.2120 by the press time.

Anxious markets ahead of the US Federal Open Market Committee (FOMC) meeting could be termed as the key catalyst for the pair’s latest inaction. Even so, firming inflation expectations put a bid under the US dollar and keep sellers hopeful.

Tuesday’s US Retail Sales and Producer Price Index (PPI) for May could be traced as the latest catalyst backing the reflation fears. While Retail Sales dropped -1.3% versus -0.8% expected the PPI rose more than 6.3% forecast to 6.6% YoY. That said, the key signals for US inflation, namely the Consumer Expectations survey by the New York Fed and the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) both stay firmer of late.

Additionally, China’s largest military exercise near Taiwan and dislike for the North Atlantic Treaty Organization’s (NATO) criticism over Human Rights issues joins push for detailed investigations for covid origins to exert an extra burden on the EUR/USD prices.

It’s worth mentioning that no change in Germany’s Harmonized Index of Consumer Price (HICP) for May, at 2.4% YoY and 0.3% MoM, portrays the regional currency’s weakness and keeps the pair sellers hopeful.

Amid these plays, the US 10-year Treasury yields and the Dollar Index (DXY) remain mildly positive but the stock futures lack momentum by the press time.

Moving on, comments from the ECB Vice President Luis De Guindos may and US Housing Starts, as well as Building Permits, for May could offer intermediate moves to the EUR/USD prices, mostly downside, ahead of the Fed’s announcements.

Talking about the Fed, the US central bank isn’t expected to alter current monetary policy and hence the quarterly economic outlook and Chairman Jerome Powell’s speech will be the key events. While an increase in numbers of the FOMC members backing the rate hike in 2023 will be a bearish hint, Powell may try to defend the easy money policies and can battle the pair sellers. However, any mention of tapering should trigger a risk-off mood and will be considered negative for the EUR/USD.

Read: Fed Interest Rate Decision Preview: Chair Powell will determine market response

Technical analysis

EUR/USD fades bounce off the 1.2100 threshold below the previous support line from May 05, which in turn joins sluggish MACD signals to repeat Tuesday’s pullback from the support-turned-resistance line near 1.2145. Meanwhile, the May 13 bottom of 1.2051 and the 1.2000 psychological magnet, quickly followed by the previous month’s low close to 1.1985, will offer a bumpy ride to the pair bears after 1.2095 immediate support.