EUR/USD looks to 1.1700, refreshes monthly low on firmer USD ahead of Fed

• EUR/USD prints three-day downtrend to renew multi-day low, holds lower ground of late.
• Risk-off mood underpins US dollar’s safe-haven demand even as Treasury yields struggle amid off in Japan, China.
• A light calendar challenges momentum traders but covid woes, China headlines and geopolitics join Fed hawks to favor bears.

EUR/USD stays on the back foot around 1.1715, the monthly low, heading into Monday’s European session. In doing so, the major currency pair drops for the third consecutive day, down 0.10% intraday at the latest, to kick-start the key week.

Sour sentiment weighs on the EUR/USD prices even as the baking holiday in China and Japan restricts the market moves. Increasing optimism towards the US stimulus and extending US debt limits, not to forget slow but gradual economic recovery, brighten the odds of the Fed tapering and favor the pair bears in turn.

US Dollar Index (DXY) rises to the highest since August 23, extending last week’s run-up as the market sentiment sours. The COVID-19 fears and chatters that the US Federal Reserve (Fed) will hint tapering during this week’s Federal Open Market Committee (FOMC) could be highlighted as the main catalysts behind the moves. Additionally, escalating tensions between China and the Western allies, namely the US, Australia and the UK, also weigh on the market sentiment and underpin the US dollar.

Recently, concerns over the stimulus and debt limit gained attention after Axios reported that US Senator Manchin delay President Joe Biden’s spending package vote to 2022. On the contrary, US House Speaker Pelosi said to expect a bipartisan approach to address the debt limit, per Reuters. Further, US Treasury Secretary Janet Yellen recently renewed her call for Congress to raise or suspend the debt ceiling sometime in October, Bloomberg reported, citing her editorial op-ed in the Wall Street Journal (WSJ).

It’s worth noting that the European Central Bank (ECB) policymakers seem divided over the future tapering of the bond purchases and rate hike, per their latest speech. While Vice President Luis de Guindos keeps suggesting higher inflation and challenges for easy money in turn, governing council member Gabriel Makhlouf said on Friday that the ECB will probably end the quantitative easing program before raising interest rates but refrained from commenting on timing, as reported by Reuters. Additionally, Governing Council member Martins Kazaks said, per Reuters, “(He) Doesn't see the 2% price goal reached in the medium-term.”

Amid these plays, S&P 500 Futures drop 0.80% intraday by the press time.

Looking forward, an absence of China and Japan restricts the market’s reaction to Evergrande relating bearish headlines but the USD still benefits from the risk-off mood and the pattern may continue even as the German Producer Price Index (PPI) for August disappoint with softer figures than 0.8% expected and 1.9% prior. The reason could be linked to the pre-Fed anxiety and indecision over the US stimulus.

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

Technical analysis

Until crossing the late July low surrounding 1.1750, not to forget 50-DMA level near 1.1800, EUR/USD bears remain directed towards the yearly bottom close to 1.1665.