EUR/USD retakes 1.20 handle, all eyes on the Fed

The EUR/USD rose to a nine-day high of 1.2020 in Asia as the greenback weakened ahead of a US Federal Reserve meeting where policymakers are expected to decide on shrinking the central bank's USD 4.2 trillion in bond holdings.

Forward guidance will the main driver of the dollar

Kathy Lien from BK Asset Management says, " while balance sheet shrinkage is very likely, Janet Yellen may not want to drive U.S. rates even higher by signaling that a rate hike is around the corner and her guidance will be the main driver of the dollar.

Focus on Dot Plot

James Chen from Forex.com writes, " The key question now is how the Fed will present the outlook for interest rate hikes going forward. Central to this outlook will be the critical dot plot forecast, which details the future expectations for interest rates by individual Fed members and often moves markets in itself. Also eagerly awaited will be the Fed’s decision and plan to begin reducing its bond holdings, which it refers to as balance sheet normalization."

EUR/USD Scenarios

Markets have boosted expectations for a third interest rate hike in December to nearly 60%. The EUR/USD could fall back to 1.17 levels If increased market expectations for rate hikes are confirmed by the Fed.

If the Fed remains characteristically dovish, the EUR/USD could print fresh multi-month highs above the recent high of 1.2092 [September 8 high].

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes-

"The short-term picture for the pair shows little directional strength ahead of the event, which will be the main market mover this Friday. The long term bullish trend remains firm in place, as the pair remains firmly above the daily ascendant trend line coming from April's lows, currently in the 1.1820 region, a level that can be tested on an extremely hawkish surprise from Yellen & Co. Shorter term, and according to the  4 hours chart, the pair presents a neutral-to-bullish stance, as the price holds above all of its moving averages, with the 20 SMA aiming to cross above the 100 SMA, but coming from a consolidative stage around it, whilst technical indicators head nowhere, right above their mid-lines. Stops are suspected above 1.2030, the immediate resistance, with a break above it favoring an advance towards the 1.2100 level."