EUR/USD: It's a bear's world, but it wouldn't be nothing without a neutral FOMC

• EUR/USD is in the bear's layer in anticipation of a dovish ECB.
• EUR/USD is embarking a test to below 1.1100 with scope to the 1.0980.

EUR/USD is trading in a chop on Wednesday, consolidating the recent round of supply and a short market getting shorter as the Federal Reserve expectations are dialled back to neutral. EUR/USD is currently trading at 1.1146, virtually flat on the day between a range of 1.1126 and 1.1155. 

The Fed' is priced in for a 25 basis point cut and it would be no surprise to see further dollar appreciation should the Fed only cut by 25 basis points while giving off a wait and see approach with respect to inflation and US economic data before swaying towards a specific bias one way or another. 

However, first up, we have the European Central Bank, (ECB), interest rate decision. The ECB is expected to keep rates on hold but markets will look to see if the central bank alters its guidance and that is where the trade will be. After today's reminder of the poor state of the economy in the eurozone with disappointing PMI's, the odds of a more dovish tone are higher than a hawkish evaluation.  

Where is the trade in EUR/USD?

Should those who wish to be long of the Dollar ahead of the Fed's decision next week, anticipating a rate cut of just 25 basis points but an overall neutral forward outcome, fading upside corrections will be the play targeting fresh bearish ranges. However, should Draghi deliver anything short of a strong dovish bias, there is some upside to play for with the market already being so short, betting on a Fed rate cut. The non-committed shorts and their stops will be the first to be cleared out from 1.1180 to 1.1235 areas (current ATR*1.5 and prior areas of support/resistance).

However, given that a Fed cut is likely to be followed by the ECB lowering its deposit rate in September, (which is where the trade will be tomorrow), it is difficult to expect net EUR short positions to fall significantly lower from current levels while expectations for the interest rate differential between the US and the Eurozone remain skewed in favour of the dollar for foreseeable future. Moreover, the US continues to outperform the Eurozone and until the Fed' points to a new easing cycle the Dollar should retain its value, at least for the next half of this year. 

"With the manufacturing series remaining in contractionary territory, this will continue to build the case for ECB easing, with EUR/USD already starting to front-run the likely dovish ECB message tomorrow. We continue to expect the cross to test the 1.1100 level this week,"

analysts at ING bank argued. 

EUR/USD levels

The technical view from analysts at Commerzbank coincides with the bearish fundamentals, noting that EUR/USD has eroded the March and mid-June lows at 1.1181/76 on a closing basis and attention has reverted to 1.1110/06 the April and May lows:

"It is on the defensive very near term and while we look for this to ideally hold, failure here on a closing basis will introduce scope to the 1.0980 2018-2019 support line, which in turn guards the 78.6% retracement at 1.0814/78.6% retracement. The intraday Elliott wave counts indicate that the 1110/06 lows should hold."