EUR/USD: Indecisive above 1.1700 as Fed tapering looms

• EUR/USD retreats from intraday high, teases monthly low for third consecutive day.
• Market sentiment improves over Evergrande, US debt limit headlines.
• ECB policymakers cite inflation risks but fears of another real-estate player’s default in China poke buyers.
• Fed widely anticipated to provide hints of tapering, bears remain hopeful even as Powell is famous for surprises.

EUR/USD eases to 1.1722 amid the pre-Fed trading lull heading into Wednesday’s European session. In doing so, the pair traders struggle to portray the market optimism, mainly emanating from China.

The People’s Bank of China’s (PBOC) heavy liquidity injection, of around 110 billion yuan, joins Evergrande’s ability to pay coupons on the expiry date of September 23, previously doubted, to favor the risk-on mood. However, news that China’s other real-estate player, namely Guangzhou R&F suspends bond trading challenges the market sentiment.

Earlier in Asia, the International Monetary Fund’s (IMF) Chief Economist Gita Gopinath sounded optimistic over China’s ability to tame the fears emanating from the real-estate firm.  On the same line were hopes of the extension to the US debt limit expiry the House votes 217-207 to favor temporary government funding and debt limit increase debate.

Alternatively, chatters that the European Union (EU) and the US aim to pledge more enforcement to curb China's risk, backed by Bloomberg, joins the fears of Fed tapering and downbeat comments from the Asian Development Bank (ADB) to also challenge the mood. “Developing Asia's economic rebound this year could be dented by the rapid spread of the Delta coronavirus variant,” said ADB per Reuters.

On Tuesday, European Central Bank’s Vice President Luis de Guindos and policymaker Yannis Stournaras acknowledged upside risks to the inflation outlook, indirectly challenging easy-money in the bloc and favor Euro bulls. However, a lack of major data/events and concerns over the Federal Open Market Committee (FOMC) monetary policy meeting announcement challenged the EUR/USD bulls.

While portraying the mood, S&P 500 Futures snap a four-day downtrend to print 0.15% intraday gains by the press time while the US 10-year Treasury yields fade initial strength around 1.32%. Further, the US Dollar Index (DXY) seesaws near 93.20.

Given the Fed Day, nothing may move the EUR/USD pair except for Chairman Jerome Powell’s magic. As most market players anticipate tapering hints, a surprise will have higher repercussions and may propel the pair from the multi-day low. It’s worth noting that the options market turns most bullish over the major currency pair in three weeks ahead of the key event.

Read: Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot

Technical analysis

EUR/USD pair’s daily candlesticks confuse traders with mixed signals around the monthly low. That said, July low near 1.1750 restricts the short-term upside while bears need to provide a daily closing below 1.1700 to challenge the yearly low surrounding 1.1665.