EUR/USD capped at 1.1300 level and 21DMA as dollar stands firm pre-Fed meeting

EUR/USD upside was capped by the psychologically important 1.1300 level and its 21-day moving average just below it on Monday. At present, the pair trades around the 1.1290 mark and is set to end the day around 0.2% lower, a decent recovery from earlier session lows close to 1.1260 when the pair was, at the time, down about 0.5% on the day.

Monday’s weakness was driven by a stronger dollar rather than any idiosyncratic euro weakness. Some market commentators framed this as reflective of markets pricing in expectations for a more hawk Fed policy announcement on Wednesday. But looking at EUR/USD over a broader time horizon, Monday’s trading conditions are in fitting with the broadly consolidative conditions that have dominated in recent sessions, during which time EUR/USD has carved out an approximate 1.1250 to 1.1350ish range.

For EUR/USD to establish some directional momentum again, it is likely going to need to see a sustained breakout of these recent ranges. Perhaps this week’s Fed meeting can provide such impetus. But some dollar bulls worry that, in wake of recent hot US inflation and labour market reports and the hawkish tone of Fed Chair Jerome Powell when he last spoke earlier in the month, it will be hard for the Fed to match already very hawkish expectations for this week’s meeting.

Perhaps this impetus can come from the ECB policy announcement on Thursday. The bank is expected to announce its post-PEPP QE plans, with a temporary lift to the pre-pandemic APP QE scheme likely. Markets will likely be more sensitive to the bank’s updated economic forecasts and how ECB rate hike expectations react to these.