Key Points
The euro recovered from near two-week lows on Tuesday before German investor sentiment data which was expected to improve and as concerns over Italy's political turmoil subsided.
The Mannheim-based ZEW think tank releases its monthly survey at 1000 GMT. Its economic sentiment index is forecast to edge up to -12.0 in December from -15.7 previously.
Analysts said an improvement could see the euro rise, although a below-expected reading would exacerbate concerns about a shaky outlook for Europe's largest economy.
The euro was steady at $1.2943, staying well above a low of around $1.2880 printed on Monday. Further gains could see it target chart resistance at $1.2973, the 38.2 percent retracement of sharp fall between December 5 and December 7.
"Markets are expecting an uptick from the previous month (in ZEW data) and if that happens that will reassure euro/dollar," said Jane Foley, senior currency strategist at Rabobank.
"The Bundesbank ... has warned of the potential for poor news in Germany, and against that backdrop any good news in the ZEW will be quite supportive for the euro."
The euro was knocked last week after the Bundesbank slashed its growth forecast for Germany in 2013 to 0.4 percent from the initial 1.6 percent and warned the country could tip into recession.
The euro fell on Monday as news of Italian Prime Minister Mario Monti's earlier-than-expected resignation saw 10-year Italian bond yields jump. But it later recovered after Monti said there was no danger of a vacuum ahead the elections.
"The euro's dip below $1.2900 proved to be short-lived," said Vassili Serebriakov, strategist at BNP Paribas. "FX markets are showing some notable resilience following news of Monti's imminent resignation."
Monti's move came after former prime minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, claiming that his reform and austerity steps were dragging Italy "to the brink of a precipice."
The euro was also 0.3 percent up on the day at 1.2111 Swiss francs, with traders citing speculation that Swiss banking giant UBS could mirror Credit Suisse and implement negative interest rates on some Swiss franc cash deposits.
Fed in Focus
Investors were reluctant to aggressively buy the dollar, ahead of a two-day U.S. Federal Reserve policy meeting starting on Tuesday. It is expected to replace its expiring 'Operation Twist' programme with another Treasury bond-buying plan when it announces its decision on Wednesday.
"We anticipate the Fed will announce Treasury purchases and as that depresses yields it will have a negative impact on the dollar and that supports the euro," Rabobank's Foley said.
Many economists believe the Fed will announce monthly bond purchases of $45 billion, although some think it could be more.
The dollar index was steady at 80.301, retreating from at two-week high of 80.658 hit on Monday.
Expectations of more easing from the Fed pushed the to a two-month high of C$0.9862 per U.S. dollar, while the hit a nine-month high of $0.8367 .