The greenback has been drifting in the range of 92.30–92.90 since several Federal Reserve officials suggested that the central bank could reduce asset purchases by the end of the year.
Meanwhile, the level of 1.1850 is still a tough nut for the EUR/USD pair, which has not been able to move to a steady growth since the European Central Bank's recent announcement on its monetary policy decision.
In recent months, there has been a constant debate about when exactly the Fed should reduce monetary stimulus and raise interest rates.
The prospects for an early curtailment of QE were undermined by the August report on US employment, which turned out to be 70% weaker than economists' forecasts.
However, there were fears that the Fed would be forced to take more aggressive steps to combat inflation against the background of a jump in the US producer price index to a more than ten-year high of 8.3%.
Encouraged by such data, the president of the Federal Reserve Bank of Philadelphia, Patrick Harker, said that he would like to start the process of reducing incentives in the near future.
"We have opportunities for this. And I think we need to adopt this option," said Harker, adding that his baseline forecast still assumes an increase in inflation in the United States by about 4% this year.
"However, I see the risk that inflation may grow stronger," he said.
Many analysts consider the Fed's stimulus program and other monetary policy measures to be the main factor in increasing price pressure in the United States. The central bank buys $120 billion worth of bonds and other assets every month in order to support the national economy. Also, the central bank has kept interest rates almost at zero for 18 months.
However, the main problem is that the rate of inflation exceeds the rate of economic growth in the country.
After a decline of 3.5% last year, the US economy began to recover: the national GDP expanded by 6.5% in the second quarter.
The basic price index of personal consumption expenditures in the United States, which is the preferred indicator of inflation for the Fed, increased by 3.6% from the beginning of the year to July, which has not been observed since 1991.
At the same time, the Fed's target level of inflation is 2%.
Since price stability is half of the mandate of the US central bank, investors looked forward to the publication of monthly data on inflation in the US.
The day before, the US Department of Labor reported that consumer prices in the country in August rose by 0.3% on a monthly basis against the July growth of 0.5%.
Although economists had predicted a slowdown in inflation, its scale exceeded expectations. The core CPI on a monthly basis was only 0.1%, as a result of which the annual indicator fell from 4.3% to 4%. The last time a similar value of the base index was recorded in February.
The news that inflation in the United States is slowing down has triggered a rally of risky assets and a sell-off of the dollar.
As a result, the US currency sank to the lowest levels since September 7 in the area of 93.30 points, pushing the EUR/USD pair to weekly highs in the area of 1.1845.
"Another slowdown in general and core inflation in August is likely to be a relief for FOMC members who are concerned that high inflation rates are testing the strength of their beliefs about the temporary nature of price pressure. We still believe that the Fed will announce the curtailment of quantitative easing in November or December," Wells Fargo analysts noted.
According to them, the dollar remains afloat due to the fact that the Fed seems to be going to start reducing bond purchases.
"Nevertheless, given that many G10 central banks are likely to start tightening policy earlier than the Fed, we expect that the greenback will gradually decline in the medium term," the bank believes.
"The latest data on consumer prices in the US is a relief for the Fed, since they do not support the need for calls for a significant acceleration of the process of changing monetary policy. This has a negative impact on the dollar," Commerzbank reported.
The fact that the consumer price index in the United States, excluding food and energy, rose by only 0.1% in August, should ease the pressure on the Fed regarding the need to reduce monetary support already at the September meeting, strategists at National Australia Bank believe.
"Tapering of QE by the Fed this year is still on the table, and a decision on this may be announced in November or December," they said.
Despite this, NAB predicts that the focus of global growth will shift from the United States, which will lead to an increase in the EUR/USD pair to 1.2300 by the end of the year.
Meanwhile, analysts at Commonwealth Bank of Australia are more optimistic about the US currency.
"Inflation above the target level will be more stable than the Fed expects. Therefore, the central bank will probably have to raise the rate above market expectations, which may support the dollar in the future," they believe.
HSBC shares a similar opinion.
"Recently, COVID-19 in the US has been a serious problem, and the Fed considers this a short-term downside risk for the national economy, which seems to be losing some speed. All this fuels the idea that the Fed may postpone the curtailment of quantitative easing. A potential delay in reducing the central bank's balance sheet will be a test for the dollar, but we believe that this will be a temporary phenomenon," the bank's analysts noted.
"We still believe that the greenback will gradually strengthen in the coming quarters. First, this will happen due to a slowdown in the global economy. Secondly, the Fed is approaching a possible rate hike, which should support the dollar," they added.
Higher real interest rates in the United States compared to Europe should cause the euro to fall against the US currency, Morgan Stanley predicts.
The ECB's response function remains "asymmetrically dovish", says the bank, which adheres to a bearish view of the EUR/USD pair.
On Tuesday, the so-called "relief rally" of risky assets did not last long, and the greenback fell only to quickly reverse its losses and close the day with a slight increase in the area of 92.65.
Meanwhile, the EUR/USD pair retreated from the weekly peak and ended yesterday's trading near 1.1805.
Although the US inflation figures were weaker than expected, the dollar still manages to attract the bulls.
Lingering concerns about the impact of the COVID-19 delta variant on global growth prospects, fueling demand for safe-haven assets, as well as the beginning of a reduction in quantitative easing by the Fed in the rear-view mirror are holding back the bearish movements of the dollar.
The greenback fell to 92.40 points on Wednesday, and then rose to 92.56 points, which is about 0.1% lower than Tuesday's closing levels.
At the same time, the EUR/USD pair failed to recover to the area of 1.1830 after the previous day's drawdown.
The data on industrial production published today on both sides of the Atlantic did not make significant changes in the balance of power.
Thus, the volume of industrial production in the eurozone in July increased by 1.5% in monthly terms. The same indicator in the United States increased by 0.4% in August.
Apparently, the positioning of market participants is still being built around the Fed meeting, which will be held on September 21-22 and at which the central bank can begin to prepare the ground for normalizing policy, possibly as early as November.
"Now there is a rather interesting moment: concerns about the delta strain are still in the air, but at the same time central banks are already curtailing incentives or are going to do it. That is why there is wariness in the markets, " Brooks Macdonald analysts said.
There is a week of silence until the next FOMC meeting, during which representatives of the central bank do not comment. This leaves investors alone with painful expectations.
In light of the recent price movement, the USD index continues to consolidate. The nearest resistance is located at 92.90, the initial support is at 92.30.
As for the EUR/USD pair, the overall picture remains ambiguous: it has fallen below the 100-day moving average, but is staying above the 200-day moving average. The pair retains a bearish attitude, although it is not strong.
The resistance is in the area of 1.1835 and further at 1.1850 and 1.1870. A breakdown of the last mark will accelerate the growth rate and bring into play monthly highs above 1.1900.
The support is at the level of 1.1800, followed by 1.1740, 1.1725 and 1.1690.