EUR/USD drifts away from long-term highs with all eyes on the Fed

EUR/USD trims gains on Wednesday, pulling back from 1.1879 highs, but remains trading above previous long-term highs, at 1.1830, as markets turn cautious heading into the Federal Reserve's (Fed) Monetary Policy Decision. The pair has rallied nearly 2% from last Friday's lows, as investors anticipated a quarter-point rate cut to be announced at 18:00 GMT and one or two more reductions before the end of the year.

The weak US labour data seen in recent weeks, coupled with moderate inflationary pressures, has boosted monetary easing bets. The ball is now in the Fed's court, and a rate cut is pretty much a done deal, but the dovishness of the bank's forward guidance might be overestimated. Fed Chairman Jerome Powell is likely to refuse to commit to a certain rate path, which might jolt the risk rally. The Fed rate decision will be released at 18:00 GMT, while Powell's press conference will start at 18:30 GMT.

US data released on Tuesday revealed that Retail Sales increased more than expected in August, although the loosening labor market, the deteriorating outlook of the economy, and the increasing prices stemming from higher trade tariffs are weighing on consumer spending.

In Europe, the Harmonized Index of Consumer Prices (HICP) slowed down to a 0.1% monthly growth and 2% yearly advance in August, against market expectations of steady 0.2% and 2.1% respective readings. The core inflation, more relevant from the monetary policy perspective, has grown at 0.3% on the month and 2.3% year-on-year, unchanged from July.

Daily digest market movers: A cautious Fed stance might snap the risk rally

• The US Dollar has been battered over the last few days as investors ramped up their bets for a dovish turn by the Federal Reserve. At this point, investors might be disappointed if the Fed fails to commit to investors' expectations and maintains that further monetary policy decisions will be data-dependent.
• The Fed Board of Governors will include the former Trump economic advisor, Stephen Miran, who swore in on Tuesday, replacing Adriana Kugler. Governor Lisa Cook will also be on the board as a US court of appeals dismissed US President Donald Trump's bid to oust her.
• On the macroeconomic front, Tuesday's data showed that US Retail Sales grew 0.6% in August and 5% from the same month last year, beating expectations of a 0.2% monthly increase and a 4.1% year-on-year growth. July's data was revised up to a 0.6% increase and a 4.1% yearly increment from previous estimations of 0.5% and 3.9%, respectively.
• In Europe, the German ZEW Economic Sentiment Index improved to 37.3 in September from 34.7 in August, against the market consensus of a decline to 27.3. The Current Situation Index, on the other hand, deteriorated to -76.4 from -68.6 in the previous month, below the -75 reading forecasted by market analysts.
• Likewise, the Eurozone's September ZEW Economic Sentiment Index showed an unexpected improvement to 26.1 from 25.1. The consensus had anticipated a decline to 20.3.
• Eurozone Industrial Production bounced up 0.3% in July following a June's 0.6% drop. Year-on-year, factory activity accelerated 1.8% following an upwardly revised 0.7% growth in June. The market's consensus pointed to 0.4% and 1.7% respective increases.

Technical Analysis: EUR/USD might be ripe for a bearish correction

EUR/USD has rallied continuously for the last four days, breaking through the top of the ascending channel and pushing the Relative Strength Index (RSI) on the 4-hour chart to strongly overbought levels.

The pair is likely to remain little moved ahead of the Fed decision, but the conditions are set for some correction, especially if Fed's Powell dampens investors' hopes of a steep monetary easing cycle.

Downside attempts are likely to find support at 1.1830, where the July 1 high meets the ascending channel's reverse trendline. Further down, the September 9 low at 1.1790 and the intraday support of 1.1755 are likely to be the next targets.

To the upside, Tuesday's high is at 1.1878, and the 161.8% Fibonacci extension of the August 27-September 1 rally is at 1.1885. Above here, the 1.2000 psychological level emerges as a plausible target.