EUR/USD - Above 1.16, but H&S neckline hurdle intact, Vols hit 4-month low

• EUR/USD technical recovery struggles to gather pace
• The spot still trades below the head and shoulders neckline
• Options implied volatility hits 4-month low as Catalan fears recede

EUR/USD struggled to gather upside momentum on Tuesday, even though the he Eurozone economy grew faster than expected last quarter and unemployment fell to its lowest in almost nine years.

The failure to capitalize on the sharp recovery from Friday's low of 1.1574 could be due to the weak Eurozone preliminary inflation number. The spot clocked a high of 1.1655 in Asia before falling to a session low of 1.1631.

Head & Shoulders neckline hurdle intact

The technical chart shows the currency pair is not out of the woods yet. The head and shoulders neckline hurdle of 1.1671 is still intact. Only a break above the key level would offer hope to the EUR bulls.

Vols hit 4-month low

The one-month at the money (ATM) option volatility dropped to 5.96; the lowest level since June end. The drop in vols indicates increased confidence among investors that the Spain-Catalan standoff will reach a peaceful conclusion.

However, a drop in the vols is usually accompanied by a rally in the underlying. The EUR has remained on the back foot even though the volatility gauge fell sharply from 8.475 (Post-Sept ECB high) to 5.96. The risk reversals turned negative as well. Thus, bear grip is strengthening.

Focus on Fed

Kathy Lien from BK Asset Management says, "the dollar will rise into and on the back of the FOMC rate decision" and adds, "the Fed needs to be unambiguously hawkish in order to avoid a sell-off in the dollar.

The EUR/USD could drop to 1.15 handle if the policy statement shows two or more policymakers favored immediate tightening.

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes - "In the 4 hours chart, the short-term picture turned modestly positive, as despite the price surpassed its 20 SMA the indicator maintains its bearish slope, while the RSI indicator consolidates within bearish territory, and the Momentum indicator heads north above its mid-line. Overall, the upcoming trend will depend on the events scheduled for the US this week, including the above mentioned and the Nonfarm Payroll report on Friday, but the risk is lean towards the downside as long as the price remains unable to surpass  the 1.1660/75 region."

Support levels: 1.1600 1.1575 1.1550

Resistance levels: 1.1670 1.1700 1.1745