Investing.com -- EUR/USD inched up on Tuesday extending gains from the previous session, ahead of the Federal Reserve's first interest rate decision on Wednesday afternoon since the U.S. central bank abandoned a seven-year zero interest rate policy at a historic meeting last month.
The currency pair traded in a tight range between 1.079 and 1.0875, before settling near session-highs at 1.0868, up 0.0018 or 0.17%. After hitting a two-week closing low at 1.0797 late last week, the euro has recovered somewhat against the dollar over the last two sessions. With several trading days left in the month, the euro is still down by roughly 1% in January against its American counterpart.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
While the Federal Open Market Committee (FOMC) is expected to raise short-term interest rates as much as four times in 2016, the central bank has sent strong signals that it will hold rates steady on Wednesday at the completion of its two-day January meeting. Last month, the Fed raised the target range on its benchmark Federal Funds Rate by 25 basis points, completing its first rate hike in nearly a decade.
Since the meeting, though, a wave of weak economic data in China and sluggish inflation forecasts might compel the Fed to slow its pace of tightening. At a press conference following the December rate decision, Fed chair Janet Yellen reiterated that the FOMC will avoid being "mechanical" in subsequent upward moves by taking a data-driven approach to each decision.
In its latest median projections, the FOMC anticipates that the Fed Funds Rate will reach 1.4% by the end of 2016, before approaching 2.5% by the completion of 2017. Any rate hikes this year are viewed as bullish for the dollar, as foreign investors pile into the greenback in order to capitalize on higher yields.
Elsewhere, U.S. home prices ticked up by 0.5% in November, in line with analysts' forecasts, amid solid gains in the Mountain and Pacific regions. It followed comparable 0.5% gains a month earlier. On an annual basis, housing prices are up 5.9%, slightly below October's rate of 6.1%. The Conference Board also said on Tuesday that its Consumer Confidence Index for January surged to 98.1, considerably higher than consensus estimates of a 96.0 reading.
In Europe, investors await the release of employment data in France and Italy, as well as monthly inflation figures in Germany later this week for an updated outlook on the strength of the economy throughout the euro zone. It follows dovish comments from ECB head Mario Draghi last week that a new round of easing measures could be forthcoming in March to stave off risks of deflation.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.25% on Tuesday to close at 99.07. The index remains near 12-month highs from December, when it eclipsed 100.00.
Yields on approximately one-third of government bonds in the euro zone traded in negative territory on Tuesday in response to Draghi's comments. Bond yields on the German 2-Year and 5-Year bunds both fell to record-lows.
The spread between the U.S. 10-Year and the Germany 10-Year increased slightly to 154 basis points, as bond yields on U.S. 10-year Treasuries settled at 1.99%, its lowest closing level in nearly a week.