On Wednesday, the greenback fell by almost 0.2% against its main competitors, including the euro, amid some improvement in risk sentiment.
The EUR/USD pair ended yesterday on a positive note around 1.1815, as did the key US stock indices.
At the same time, the rise of the S&P 500 by more than 0.8% was the highest in almost three weeks after all 11 sectors of the index closed trading with a decrease a day earlier.
Investors were encouraged by the news that industrial production in the United States expanded by 0.4% in August compared to July. The utilization of industrial capacities in the country also increased last month, to 76.4%.
In addition, the September NY Empire State manufacturing activity index was almost twice ahead of expectations and rose above 30 points for the second time in a year.
This, along with the slowdown in annual inflation in August for the first time since October, added to the positive.
However, Bank of America analysts warn that too much optimism has already been taken into account in stock quotes.
They expect to see the S&P 500 index at the level of 4250 points at the end of the year.
The main problem is that the US market is vulnerable, given that there has not been a downward correction of more than 10% since March 2020, analysts at Morgan Stanley note.
They predict a market pullback of 10-15% by the end of this year.
The "clouds" over Wall Street are already gathering.
First of all, this is uncertainty about the plans of the US Congress to change the debt ceiling. The two-year agreement to suspend the national debt limit expired at the end of July, and the country's Finance Minister Janet Yellen warned that next month the government will have nothing to pay the bills with.
October 1 is also approaching, which means that it's time for America to adopt a new state budget. Failure to agree on it can theoretically lead to the suspension of the government, although Congress often manages to solve the problem with temporary extensions. However, in the absence of a clear majority in the legislative authorities, it is difficult to predict which of the parties will back down.
If we add the controversy surrounding US President Joe Biden's $3.5 trillion spending plan, which the Democrats hope to adopt without squeezing the Republicans' votes, it turns out that the second half of September is fraught with political risks, whose legs are growing out of financial problems.
In addition, the Federal Reserve will hold a two-day meeting next week, and it is not yet known whether it will clarify the understanding of the pace at which the central bank will narrow the quantitative easing program and when there will be a possible increase in interest rates.
Therefore, it is not surprising that investors are in no hurry to abandon the protective dollar, leaving the USD index within the range in which it has been trading since the end of June.
Concerns about the impact of the delta variant of the coronavirus on the global economic recovery continue to support the greenback. The 92-94 range remains unchanged for now and will most likely remain until the next FOMC meeting or even longer, Westpac strategists believe.
Disturbing news this week came from China, which made investors worry about the state of the global economy as a whole.
Statistical data published on the eve showed that in August, industrial production in China grew at the weakest pace since July 2020, adding 5.3% against 6.4% a month earlier. At the same time, the growth of retail sales also slowed significantly – from 8.5% to 2.5%.
"There are three high-frequency indicators, namely: bank lending, electricity production and freight rail transportation. All of them slowed down in August. This indicates that the recovery of the Chinese economy in the second half of this year has faced many obstacles," MUFG Bank specialists said.
"Currently, the greenback receives support from the narrative of a potential tightening of monetary policy in the US and a slowdown in global growth in the medium term. A slight decrease in US inflation in August did very little to ease such concerns," ING analysts noted.
The growth of consumer prices in August in the United States in annual terms slowed for the first time since October and reached 5.3% against 5.4% in July.
However, these data are unlikely to change the intentions of the US central bank regarding the curtailment of stimulus measures, analysts at Charles Schwab believe.
"Whatever the Fed is leaning towards, we do not believe that the latest figures were so far from assumptions as to change the intentions of the regulator," they said.
"We are waiting for the FOMC meeting next week and do not think that the dollar will go too far in any direction until then," Barclays strategists said.
On Thursday, the US key indices moved to a decline, and the greenback turned around after Wednesday's pullback, and began an offensive across the entire spectrum of the market.
The USD index is flirting with the level of 92.90 today. A break above this mark will open the door to 93.20, and then to 93.70.
The greenback was supported by an unexpected increase in the volume of retail sales in the United States in August – the indicator increased by 0.7% compared to July, with a forecast decline of 0.8%.
Consumption is central to the US economy, and a strong retail sales report for August suggests that the Fed is getting one step closer to tightening monetary policy. This contributes to the strengthening of the dollar and has a negative impact on stock prices.
Against the background of increased demand for the US currency, the EUR/USD pair sank to three-week lows around 1.1750.
Even the positive comments of European Central Bank President Christine Lagarde could not cheer up the single currency.
"The recovery in the eurozone is faster than expected six months ago, mainly due to the rapid vaccination campaign. But not all the problems are still left behind," she said.
The fact that the ECB continues to adhere to a stimulating monetary policy, even despite a slight adjustment in the volume of bond repurchases under the PEPP program, does not add to the optimism of the single currency.
"The process of normalization of monetary policy will begin only when the regulator is confident that the 2% inflation target will be steadily achieved. A premature tightening of policy will stifle the recovery of the eurozone economy," Isabel Schnabel, a member of the ECB's Governing Committee, said on Monday.
An alarm bell for the single currency is also the slowdown in economic activity in China, which will negatively affect Europe, whose growth is strongly dependent on Asian demand, as well as a number of emerging economies that actively trade with China.
In addition, the euro is suffering due to uncertainty about who will take the helm of Germany.
If the polls are correct, for the first time in the country's post-war history, the ruling coalition will have to consist of three parties, and Olaf Scholz will become the fourth center-left chancellor. At the same time, it is possible that the center-right Christian Democrats will lead the government, even taking second place in the elections. Everything will depend on the coalition being built. Citizens have already started voting by mail on the eve of the election day on September 26.
On Thursday, the EUR/USD pair touched levels that it has not visited since the end of August.
Ideally, the pair should stabilize before 1.1750, but it should be borne in mind that the intraday analysis of Elliott waves gives bearish signals, analysts at Commerzbank note.
"The support at 1.1752 covers the March low at 1.1704 and 1.1664 (the August low). On the other hand, an increase above the resistance line at 1.1863 will weaken the downward pressure and allow the pair to test the mark of 1.1909 and the area of 1.1990-1.2014 again," they believe.
