EUR/USD shed early gains and turned negative while other majors eased off their highs as markets prepared for a Fed meeting that will spotlight officials' forecasts after a major policy shift.
Investors will scrutinize the FOMC statement on Wednesday, along with the summary of economic projections and the news conference for hints of how the employment-focused policy shift toward inflation tolerance, announced last month, will be implemented.
August retail sales will be the warm-up act.
With the Fed expected to affirm the likelihood of holding rates near zero for some time, perhaps into 2023, it would take a drastic acceleration in the economic recovery and prices to change dovish expectations.
While markets have factored this in, they are still evaluating a steady flow of ECB speakers since Friday who have highlighted the euro's exchange rate as a major factor in inflation, the bank's central focus.
That has left EUR/USD in the lurch, and it ran into sellers right at 1.1900.
A breakdown in USD/CNY below 200-week moving average support nL1N2GC19G after more solid Chinese economic data nL4N2FF26S set the early risk-on tone that initially weighed on the dollar nL1N2GC19G.
The pound extended its rebound from oversold readings and six-week lows with modestly supportive jobs data nL1N2GC0XD and hopes the bill to breach the Brexit treaty working its way through Parliament will be defeated or modified due to heavy opposition nL8N2GB0MW.
Sterling's rebound has run into 55-day moving average resistance at 1.2935, by the daily cloud top and the broken uptrend line from March's pandemic lows.
EUR/GBP continued working off its recent overbought readings, finding support above June's 0.9175 swing high, despite strong ZEW data nL8N2GC2CM.
Empire State nN9N2E800E and manufacturing production nL1N2GC0IV data had little impact since the bar for rate hikes has been raised by the Fed's policy pivot to average inflation targeting.
USD/JPY slid toward August's lows and options props by 105 as this week's recovery in stocks and risk-taking undermined the dollar, now seen as a key risk-funding currency given the Fed's extremely accommodative policy path versus the BOJ, which has already taken policy rates and the yield curve as low as they can without doing more harm than good nL1N2GC0QI.
The risk-on mood was tested after the WTO ruled U.S. tariffs on China had not been justified nL8N2GC4PK, causing an uptick in trade war anxiety.
Oil rallied on U.S. production shutdowns in the Gulf Coast due to Hurricane Sally and demand hopes.