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On Tuesday, the euro/dollar pair inched up by 0.04% to 1.1595. The pair has been rising for the third day in a row.
Traders' cautious approach capped the pair's rise, thus reducing the greenback's losses.
On Monday, the key US stock indices closed in the red, dropping by 0.3-0.6%.
Notably, the S&P 500 stopped the largest rising session since 1997. It was climbing for 8 sessions in a row.
Some analysts suppose that it is just a pause after the days of a continuous advance.
Strong data on companies' revenue for the third quarter is supporting the stock market. Notably, there are still concerns about the increasing price pressure and supply disorders.
According to strategists at JP Morgan, the seasonal surge in the number of infected people and the pace at which the Fed will raise interest rates are likely to pose the main risks to the market.
On Tuesday, the US published its PPI report that unveiled a rise of 0.6% compared to an increase of 0.5% in September.
The faster growth was mainly caused by higher prices of petrol (+6.7%). On a yearly basis, the US producer prices jumped by a record 8.6% like in the previous month.
At the recent meeting, the Fed said that high inflation would be "transitory" and it was no use to hurry to raise the key interest rate.
Nevertheless, it is quite possible that the regulator will have to take more decisive measures to curb the inflation growth.
Speculation about the issue was supported by the announcements made by some FOMC members. They said that the regulator might raise the interest rate in 2022. This fact together with cautious trading allowed the US dollar to attract investors as a safe-haven asset.
At the same time, Germany disclosed its ZEW economic sentiment report. The indicator jumped to 31.7 points from 22.3 points in October. The current situation indicator declined to 15.2 points from 21.6 points in the previous month.
In addition, Klaas Knot, a member of the ECB Governing Council, provided some dovish comments, which failed to encourage bulls of the euro/dollar pair. He said that next year the EBC would hardly have enough reasons to raise the key interest rate.
On Wednesday, the US dollar recouped some of its losses and consolidated near 94.00 before the publication of the US inflation figures.
If the US dollar index advances above 94.55, reaching a multi-month high, traders will focus on such levels as 94.65 and 95.00.
If the US dollar index breaks the support level of 93.35, it may slide to 93.80 (the 61.8% Fibonacci retracement level), and then to 93.50 and 93.20.
On Wednesday, traders were mainly focused on the US inflation report. The data was expected to influence the Fed's stance and the greenback's movement.
Economists polled by Reuters foresaw the CPI to rise to 4.3% from 0.3%.
Five scenarios for the euro/dollar pair that depend on the inflation report.
1.The data meets the forecast.
In this case, the US dollar is likely to remain within the same trading range, whereas the euro/dollar pair will have to search for new drivers.
2.The data exceeds the forecast.
Such results may force the Fed to launch the tapering process, thus causing the greenback's appreciation and a drop in the euro/dollar pair.
3.The data is well above the forecast.
In this case, the US dollar may surge in response to a sharp rise in the benchmark rate that could take place as early as in March 2022. The euro/dollar pair may slide below important support levels.
4.The data is below the forecast
This may cause doubts about consistently high inflation. What is more, the Fed may decide to delay the QE tapering. As a result, the US dollar will fall, thus pushing the euro/dollar pair above an important resistance level.
5.The data is significantly lower than expected
If the indicator drops to 3.7%, the Fed may question the necessity of higher interest rates. Thus, the euro/dollar pair may jump above two resistance levels.
Cautious trading adds to the US dollar stability, preventing the main currency pair from recovering.
At the moment, the euro/dollar pair is testing the support area of 1.1580-1.1570, near which we see a 50-day moving average. If this area turns into the resistance level, the pair will fall even deeper. Next target for bears could be located at 1.1530, whereas an important psychological level is at 1.1500.
On the other hand, the level of 1.1600 may act as the first obstacle, where the 100- and 200-day moving averages could be seen. This level has been acting as strong resistance since the beginning of the week. Notably, the levels of 1.1620 and 1.1650 may cap the pair's rise in the short term.
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