• EUR/USD has risen back to levels near 1.1850. 
  • The yuan sell-off likely put a bid under EUR/USD. 
  • Federal Reserve is expected to reiterate the dovish stance. 
  • Dollar buying could emerge if the central bank raises growth forecasts.

EUR/USD has recovered early Asian session lows, possibly tracking a continued rally in China’s yuan. However, big gains may remain elusive in Europe on caution ahead of Federal Reserve’s (Fed) rate decision. 

The pair is currently trading mostly unchanged on the day at 1.1848,  having hit a low of 1.1829 early Wednesday. At one point, the single currency looked set for a deeper decline to 1.18. 

However, the selling pressure weakened, allowing recovery after the People’s Bank of China’s decision to raise the daily yuan fix by most in five months triggered broad-based US dollar selling. 

China’s central bank set the yuan reference rate at 6.78725 per US dollar – the highest level since May 9, 2019, and up 397 pips from Tuesday’s fix of 6.8222. The yuan rose to a fresh 16-month high of 6.7682, extending the 4% quarter-to-date gain. 

Additional bullish pressure for the EUR may have stemmed from reports that UK’s Prime Minister Boris Johnson is prepared to compromise with Tory party rebels over the Brexit bill. 

All eyes on the Fed

The US central bank is expected to keep interest rates unchanged at record lows and reiterate tolerance for high inflation. The markets have already factored the odds of rates remaining low for a prolonged period. The Fed funds futures show implied rates pinned down near zero well into 2023, according to Reuters. 

As such, the focus would be on the Fed’s growth and inflation forecasts. If the Fed raises the growth outlook, the greenback would pick up a bid, sending EUR/USD, as noted by BK Asset Management’s Kathy Lien. 

Ahead of the Fed decision, the pair may take cues from the Eurozone Trade Balance and the US Retail Sales data. 

Technical levels