EUR/USD pulled back towards the 1.1600 level early on Wednesday, ahead of the potentially pivotal Fed statement to be issued later in the day at the conclusion of this week’s two-day FOMC meeting. The currency pair pulled back as the embattled dollar attempted yet another relief rally in its struggle to rebound since the beginning of this week. At this point, recent market expectations that the Fed will continue to sound dovish regarding interest rates remain prevalent, which helps account for the sustained pressure on the dollar.
Since much of this expectation has already been heavily priced-in to the weakened dollar, however, any surprise from the Fed should conceivably be more likely to be positive for the beleaguered greenback. While the Fed today is expected to affirm its commitment to reduce its balance sheet, probably to begin in September, what Fed officials will say about interest rates going forward is still largely unknown. Recent comments from Fed policymakers have suggested that much higher rates should probably not be expected. But if the FOMC statement unexpectedly backs off from this dovish stance, the dollar could get a boost.
In the event of such a hawkish surprise, a boost for the dollar could bring EUR/USD further off its lofty highs. Just on Tuesday, the currency pair hit a key upside resistance target at 1.1700 before pulling back. The pair has been due for a more significant pullback, and any hawkish Fed surprise could serve as a catalyst for such a pullback. From a technical perspective, any Fed-driven breakdown below 1.1600 support has a key downside target for a pullback around the 1.1450 support level.