While the Federal Reserve was preparing for a two-day meeting, disturbing news came from China.
The country's largest developer - Evergrande Group - was on the verge of bankruptcy.
Fears about a possible default of the Chinese real estate giant with debt obligations worth more than $300 billion provoked a sell-off of risky assets in Asia, which then spread to Europe and Wall Street.
Following the results of Monday's trading, key US stock indexes fell sharply.
At the same time, the S&P 500 sank by 1.7%, showing the most losses since May 12.
Fears that the bankruptcy of the largest developer in China could cause a chain reaction of non-payments not only in the Chinese, but also in the world market, pushed investors to a protective greenback.
Against this background, the US currency reached a four-week peak around 93.45 points.
However, the dollar quickly lost its positive momentum due to a decrease in the yield of 10-year US bonds by 4.7%.
This allowed the EUR/USD pair, which started the new week under moderate bearish pressure and fell to the lowest values near 1.1700 since August 23, to win back its daily losses.
As for the data, on the eve of Germany published the August producer price index, which increased by 1.5% on a monthly basis and 12% on an annual basis. This caused moderate concerns about inflationary pressure in the EU and could be a positive signal for the euro, indicating that the European Central Bank will have to tighten monetary policy faster.
However, these concerns were extinguished by ECB board member Isabel Schnabel, who said that the central bank is happy to see the "chances of growth" of inflation after it had underestimated its 2% target for so long.
"What we are seeing is some chances of an increase in the prospects for inflation. Given that inflation has remained at such a low level for so long, I think we should be happy that inflation is moving up in the desired direction," said Schnabel.
In addition, she said that the ECB should make a decision on PEPP and APP in December, and since the further path is still uncertain, it would be a mistake to tighten monetary policy too early.
As a result, the EUR/USD pair ended yesterday with a symbolic decrease of 0.01% near 1.1726.
On Tuesday, the markets are licking their wounds, easing the pressure of dollar bulls.
Stock indexes in the United States opened higher today, recovering from Monday – the worst day in several months amid easing concerns about the debt crisis in the real estate sector of China.
Although China's second-largest developer remains in a difficult situation, the head of Evergrande expressed confidence that the company will recover after a difficult period.
In addition to these soothing words, Wall Street analysts expressed optimism, who believe that Evergrande is unlikely to face the fate of Lehman, and the markets are waiting for a domino effect.
They downplay the risk of a systemic financial crisis in China, pointing to the still wide range of opportunities available to Beijing.
"We do not view the Evergrande crisis as a repeat of the Lehman incident in China, because politicians are likely to prevent systematic risk in order to buy time for debt settlement and offer marginal easing for the general environment of creditors," Citigroup analysts said.
Analysts note that investor sentiment is quite fragile, but the underlying indicators indicate that the market situation has an increase in risk appetite.
"When we look at the fundamental factors – the overall growth and the state of the economy as a whole – we are still confident that the situation will correct itself," JP Morgan strategists said.
A weekly survey of JP Morgan investors showed that 61% of respondents plan to increase their presence in the stock market.
The EUR/USD pair tried to take part in the rally of risky assets, but attracted bulls on the outskirts of 1.1750, turned down and marked a local low at 1.1716.
The comments of the ECB representatives became a downward factor for the euro.
Thus, ECB Vice-President Luis de Guindos said that inflation may exhaust the growth potential around November, while the central bank does not note any indications that wages are growing.
In addition, despite the fact that the ECB is reducing the volume of bond purchases under the PEPP program, it can compensate for this by increasing purchases under another scheme, APP. At least, another ECB member, Yannis Stournaras, said this today. The more money the ECB prints, the stronger the pressure on the euro will be.
At the same time, traders' attention is drawn to the next two-day meeting of the Fed, which starts on Tuesday and ends on Wednesday.
Although the central bank is unlikely to announce changes in policy, it may hint at the start date of the reduction of the bond purchase program, for example, in November.
At the same time, it is possible that lower inflation in August and the latest disappointing report on US employment may give Fed Chairman Jerome Powell the opportunity to push back the changes to December.
The Fed will announce its verdict on monetary policy only tomorrow, and so far investors are refraining from active actions against the US currency.
The USD index is trading in the range of 93.00–93.30 on Tuesday, remaining below the monthly high recorded the day before.
As for the EUR/USD pair, it continues to trade below the 50 -, 100-and 200-day moving average. This suggests that, in general, the bears are in control of the situation.
The initial support is at 1.1720 and then at 1.1700 and 1.1660.
The resistance is located at 1.1750, 1.1790 and 1.1830.
