What could prop up or hinder Euro? Pros and cons of EUR/USD ahead of Fed’s meet

This pair falls in the middle/lower half of the 1.08-1.15 range that has broadly held since May (except for the extreme illiquid/risk off conditions on August 24-25).

EUR is trapped between several opposing forces at the moment. Pushing EUR higher we have:

• Risk aversion, since EUR is trading as risk off proxy (see Total FX: EUR as a risk off proxy, 7 Aug 2015)
   
• Weaker US data and falling US rate expectations.
   
• Forward-looking indicators which still point to decent domestic recovery (the aggregate Euro area PMI is still elevated around 54).

Pushing EUR lower we have:

• The prospect of further ECB QE (we look for purchases to be extended at the December 3 meeting)
   
• An interest to rebuild short EUR positions since positioning has turned relatively neutral
   
• Any time there is a recovery in risk appetite. Since the Sept FOMC disappointment, we have been suggesting short EUR/USD vol as the best way to capture these opposing forces.

In its September meeting, the ECB opened the door for further QE and made its message clear:

If things get worsen it can and will act. The GovCo is particularly sensitive to an "unwarranted tightening of financing conditions". To capture this risk, our European team has constructed a 'real financial conditions' indicator, based on the factors most important to the real economy and European Directions, 11 Sept 2015. The October meeting is likely to be too soon for action, but we think the December meeting would be an opportune moment alongside the updated staff forecasts.