• EUR/USD has lost its traction after rebounding to 1.1300 area.
  • Violation of 1.1270 could be seen as a bearish sign but EURUSD remains at the mercy of the Fed.
  • A dovish Fed surprise could open the door for a convincing rebound.

EUR/USD has turned south after failing to extend its recovery beyond 1.1300 during the European trading hours. With the dollar preserving its strength ahead of the Fed's highly-anticipated policy announcements, the pair has retreated to the 1.1270 support area. Although a drop below this level could be seen as a bearish development, investors might opt to stay on the sidelines while waiting to see how the dollar reacts to the FOMC event. 

Fed Preview: Three ways Powell could out-dove markets, dealing a blow to the dollar.

If the Fed suggests that they may start shrinking the balance sheet after the first rate hike, most likely in March, US Treasury bond yields will shoot higher and provide a boost to the greenback. The dollar is likely to benefit from a Fed decision to end QE earlier than planned by ramping up the pace of reduction in monthly asset purchases.

On the flip side, the Fed might voice its concerns over a worsening global economic outlook and communicate a patient stance with regards to tightening steps in the future. Such a tone should trigger a sharp recovery in US stocks and make it difficult for the dollar to find demand. 

EUR/USD Technical Analysis

EUR/USD's technical outlook indicates that the bearish bias stays intact in the near term with the pair staying below the descending trend line coming from mid-January. Furthermore, the lack of buyer interest is mirrored by the Relative Strength Index (RSI) on the four-hour chart, which has been staying below 50 since the beginning of the week.

The pair recovered to 1.1300 after the bearish pressure faded away near 1.1270 (static level) on Tuesday, suggesting that this level aligns as first support. If buyers fail to defend that level, 1.1250 and 1.1230 static levels could be tested. 

On the upside, resistances could be seen at 1.1300 (psychological level, static level), 1.1330 (200-period SMA) and 1.1350 (100-period SMA).

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