EUR/USD gave back some of its overnight gains as euro bulls remained cautious ahead of Wednesday's Fed meeting, where policy makers' projections are likely to be scrutinized closely by investors.
The Fed is expected to reiterate rates will remain lower for longer, which futures markets have already factored in, with implied rates FFQ3 pinned down near zero well into 2023.
However, there is some risk that officials' projections could appear more rosy than anticipated, which could drive the dollar higher.
Recent U.S. data have beat expectations.
August CPI nL1N2G80IP and import prices nL1N2GC0IV indicate inflation could be rising.
Robust August manufacturing data nN9N2BW02RnN9N2E800E along with continued jobs growth nL1N2G01W could indicate improving U.S. GDP.
Should the Fed inflation and GDP projections exceed investors' expectations, dollar buying could emerge, sending EUR/USD lower.
EUR/USD options currently show investors have diminished expectations for a move above 1.200.
Risk reversals show the premium for EUR/USD calls over puts eroding, while expiries with strikes in the 1.1600-1.1700 range have been bought nL1N2GB08M.
If EUR/USD sinks after the Fed, it could complete a head-and-shoulders top, indicating a test near 1.1500 would be possible.
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