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On Monday, the greenback was trading under moderate downward pressure, extending losses against its main competitors amid positive risk sentiment in the market.
At the end of yesterday's trading, key US stock indices rose by an average of 0.1-0.3%. The S&P 500 closed its eighth consecutive session at record highs.
Market participants were focused on the speech of Fed Chairman Jerome Powell.
Yesterday, the Fed Chair reiterated that the regulator would use its tools to curb inflation only in case it was holding above the target level for a long time.
However, dovish comments by the head of the Federal Reserve regarding the interest rate weakened the US dollar.
Jerome Powell noted that tapering of the asset purchase program announced earlier in November did not signal a new rate hike.
Against this background, the EUR/USD pair rose by almost 0.3%, extending Friday's rebound from 15-month lows and ending Monday's trading at 1.1590.
This morning, the US dollar index continued to decline and went below 94.00 for the first time since the announcement of the Fed's decision on its monetary policy last week. The main currency pair did not hesitate to take advantage of this and went above the 21-day moving average at 1.1605. However, it failed to settle above this level and retreated from 3-day highs reached earlier on Tuesday.
Apparently, the single European currency is still struggling to win buyers' favor.
And this is hardly surprising since the ECB is known for its firm dovish stance. Moreover, statistical data for the eurozone is ambiguous, and the EU members are now struggling with the fourth wave of coronavirus.
The ZEW indicator of current economic sentiment in the euro area fell to 11.6 in November from 15.9 points recorded a month earlier, while the index of economic expectations, on the contrary, rose to 25.9 from 21 points recorded in October.
"We remain wary of the eurozone and its currency," the National Bank of Canada said.
The outlook for EUR/USD remains gloomy due to such factors as supply chain constraints, rising COVID-19 cases and high energy prices/inflation. At the same time, the ECB remains on the sidelines and, most likely, will move at a slower pace than its counterparts, experts say.
Mizuho Bank remains bearish on the euro due to political risks, slowing economic growth, and differences in monetary policies in the US and Europe.
According to strategists at Mizuho Bank, market participants continue to count on the ECB to raise the interest rate in the second half of 2022. However, no member of the ECB's Governing Council has supported the rate hike so far. So, the euro will probably revert to its bearish trend if expectations for such a move wane. On the other hand, it looks like the US dollar will continue its upward trend amid expectations of a rate hike next year.
Experts added that the number of COVID-19 cases was rising in the UK and other countries close to the Eurozone. So there is a risk that coronavirus cases may likewise increase in Europe in the near future. Meanwhile, the eurozone economic indicators came in worse than expected in October, and from then on, the European economic recovery could slow even further.
"Regarding the coalition talks in Germany, the Social Democrats have reached a basic agreement with the Greens and the Free Democratic Party, and then formal negotiations are to take place. If these negotiations end with no progress, this will bring more political risks," Mizuho Bank said.
Meanwhile, concerns about inflation remain on the agenda and inspire hope in greenback fans.
On Wednesday, markets will be looking ahead for the release of the US CPI data which is forecast to rise to 5.8% in October, a record reading since December 1990.
Market expectations that the US central bank will be forced to tighten its monetary policy in order to contain rising inflation are supporting the USD.
"The US currency found resistance in the area of 94.47-94.80. A breakout of this range will allow the dollar bulls to first aim at 96.10 and then at 97.73," analysts at Commerzbank said.
Only a close below 93.45 will trigger a decline in the US dollar index to the 55-week moving average at 91.88 and further to the low of July at 91.78.
According to Credit Suisse, the euro/dollar pair has reached its top and may resume the main bearish trend soon.
"EUR/USD remains above the important support level of 1.1495-1.1493 (the high of March 2020 and 50% retracement of the 2020-2021 bullish trend), with short-term momentum remaining increasingly poor," the bank said.
"After a breakout of 1.1495-1.1493, the pair will target the 1.1377-1.1377 support area and the range of 1.1300-1.1290, where we would expect to see another pause. Resistance stays at 1.1614-18, with 1.1632-36 ideally capping. We shall maintain an immediate tactical bearish bias though whilst below 1.1689-95," analysts added.
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