EUR/USD Forecast: Fed set to fuel relief rally after Evergrande can kicked down the road

Kicking the can down the road – that term rings a bell for those trading the common currency around the euro debt crisis and is relevant for the current crisis in China.

Evergrande, the country's heavily indebted real estate company, announced it would pay the yuan-denominated debt due on Thursday. Alongside liquidity injection from authorities in Beijing, markets have stabilized, pulling demand away from the safe-haven dollar. 

Is the crisis over? Far from it, the firm's statement remains vague about other kinds of debt and risks of contagion to other construction firms and the banking sector prevails. While China is unlikely to experience a "Lehman moment" – a collapse similar to the 2008 financial crisis – authorities seem reluctant to provide a full bailout. That could have implications on the global economy. 

Looking toward Wednesday's trading, the short-term calm in Evergrande clears the stage for the Federal Reserve's all-important decision. When will the Fed taper its $120 billion/month bond-buying scheme? That is the question on investors' minds for many months, and Fed Chair Jerome Powell could signal if it comes in November or in December. 

Markets would also want more details, such as the length of the process of reducing purchases, which has implications for the first post-pandemic rate hike. Back in June, the Fed indicated two increases to borrowing costs are coming in 2023 and the upcoming release could see changes. 

Will the Fed lift or sink the dollar? Powell is a dove, backing providing more stimulus when possible, and he has reasons to signal more patience is needed. 

On the one hand, the economy continues growing at a solid pace, perhaps convincing the bank that the condition of "further substantial progress" has been met, warranting printing fewer dollars. On the other hand, the most recent inflation and jobs reports for August were underwhelming. 

See 

• Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot
• Fed Interest Rate Decision: Can Powell calm the markets and propose a taper?

In the old continent, German Chancellor Angela Merkel has made a last-minute effort to prop up her embattled successor Armin Laschet at her center-right CDU/CSU bloc. Recent polls continue showing that center-left candidate Olaf Scholz is in pole position to lead Europe's largest party. Investors prefer a coalition led by Laschet, but a "traffic-light" agreement consisting of the business-friendly FDP would also be satisfactory. Germans vote on Sunday.

Overall, the next EUR/USD moves hinge on the Fed, and it seems hard to bet against further support from Powell. 

EUR/USD Technical Analysis

Euro/dollar remains on the back foot, suffering from downside momentum on the four-hour chart and trading below the 50, 100 and 200 Simple Moving Averages. Critical resistance awaits at 1.1745, which supported the pair last week and capped a recovery attempt on Tuesday. 

Beyond 1.1745, resistance awaits at 1.1790, which was high point last week. It is followed by 1.1835 and 1.1845. 

Some support awaits at the daily low of 1.1715, followed by 1.17 and 1.1660.