The main Wall Street indices, which began trading on Tuesday with a decline, ended the session with a steady increase.
At the same time, the greenback, which tried to return beyond the 96.00 level, failed and slipped into the 95.60 area.
Against this background, the euro rose against the US dollar by more than 0.3%, to 1.1367.
The main engine of the markets yesterday was the speech of Federal Reserve Chairman Jerome Powell in the Senate.
Less hawkish than expected, Powell's comments caused the rally of the US stock market and disappointed dollar bulls.
After the release of strong data on wages and unemployment in the United States in December, investors began betting on a more aggressive tightening of monetary policy in the country in the coming year. Against this background, US stock indexes pulled back from the area of record highs, and the yield of treasuries soared to two-year peaks.
The minutes released last week from the December FOMC meeting added fuel to the fire, which led to a wave of fears that swept not only Wall Street, but also other equity markets.
However, in anticipation of Powell's speech, the bears on the stock exchanges moderated their ardor and turned out to be right.
The Fed chairman said that the American economy no longer needs an accommodative policy, but added that they need several meetings to draw up a plan to reduce the balance sheet.
Powell also expressed optimism that the problems in global supply chains will ease, and this will slow down inflation in the United States.
At the same time, the head of the Fed allowed a gradual increase in the base interest rate by the central bank if inflation in the country remains at a level higher than predicted.
Powell believes that an increase in the federal funds rate will not lead to a sharp slowdown in economic growth and a deterioration in the situation on the US labor market.
The comments made the day before by Powell's research shows that the central bank reserves maximum flexibility in constantly changing conditions and will not necessarily follow a predetermined path.
Thus, the head of the Fed not only did not provoke new sales, but also supported the rise in the segment of risky assets. As a result, the S&P index rose by almost 1%, and the EUR/USD pair approached the upper limit of the range in which it has been trading since the end of December.
A sharp improvement in investors' appetite for risk has left a protective dollar in the outsiders.
Although the S&P 500 index showed the worst start to the year in the last six years, JPMorgan Chase analysts believe that the stocks that have sunk in value look attractive to buy.
"The collapse of risky assets after the publication of the minutes from the December FOMC meeting may have been excessive. The tightening of monetary policy in the US is likely to occur gradually, at such a pace that risky assets should cope," they said.
The prospect of an interest rate hike puts pressure on expensive stocks, but will not undermine the bull market as the US economy continues to grow, JPMorgan Chase notes.
A similar opinion is shared by Goldman Sachs strategists, who confirm their optimistic forecasts that stocks will be able to withstand an increase in interest rates and rising bond yields.
"The sale of a number of high-quality stocks with a long duration may soon turn out to be excessive. Since real returns are not expected to be much higher, valuations are unlikely to be a limiting factor for stocks," they said.
Goldman Sachs analysts predict a bright future not only for the US stock market, but also for the eurozone economy, which should surpass the US economy in terms of growth rates in the next two years.
According to the bank's forecast, this year the GDP of the currency bloc will increase by 4.4%, while the US counterpart will grow by 3.5%. In 2023, eurozone GDP growth is expected at 2.5%, the US - 2.2%.
Europe's fiscal policy is likely to remain soft this year, in contrast to what some economists predict for the United States, Goldman Sachs analysts say.
"The governments of the eurozone countries will invest large sums of money in various projects in the coming years, as the process of distributing the funds of the EU's 750 billion euro joint recovery fund will continue. Meanwhile, there are certain doubts that the $1.8 trillion Build Back Better program proposed by US President Joe Biden will come to fruition. Disagreements about it among American lawmakers could jeopardize the entire plan," they noted.
"In addition, monetary conditions in the eurozone are expected to remain more favorable than in the United States," said Goldman Sachs strategists.
Although inflation has also increased in the eurozone, but not as much as in America. Consequently, politicians in Europe feel more comfortable with the continuation of monetary stimulus, they explained.
On the one hand, brighter prospects for economic growth in the eurozone than in the United States are good news for the euro.
On the other hand, a more aggressive monetary policy of the Fed will lead to a strengthening of the dollar in the long run. If the US central bank raises the interest rate in March, its European counterpart will be in the role of catching up, which will provoke a decline in the EUR/USD pair.
The main currency pair approached the upper limit of the six-week range, but quickly lost its bullish momentum as investors turned their attention to December inflation data in the United States.
The consumer price index is expected to rise to 7% year-on-year from 6.8% recorded in November.
Stronger results will help the dollar recover, as Powell acknowledged that the central bank needs to focus on the inflation target rather than the maximum employment target.
On the other hand, a weaker inflation indicator may lead to investors continuing to put in quotes a delay in reducing the Fed's balance sheet and provoke another jump in EUR/USD.
"Our estimates are in line with the market consensus forecast. At the same time, we believe that the market reaction to the December CPI release may be asymmetric. If the hawkish results are already priced in, then unexpectedly weak inflation could more tangibly undermine the US dollar and support risk appetite," analysts at TD Securities said.
The USD index found decent support around 95.50. The loss of this level could send the index further down in the short term. The next significant support is seen at 94.94. As long as the greenback stays above the 4-month support line (from September low) at 95.10, it will maintain the potential for further gains.
Danske Bank analysts believe that even a decline in US inflation is unlikely to change the Fed's forecast for rate hikes and quantitative tightening (QT).
"The focus of attention today is the US inflation data for December. Headline inflation is expected to reach 7% y/y, while core inflation is expected to hit 5.4%. At the same time, overall inflation will decrease from 0.8% to 0.4% in monthly terms. However, a lower monthly reading should not greatly affect the sentiment of Fed officials, as they need more than one month to change their position on QT and rate hikes," said the bank's strategists.
Immediate support for the EUR/USD pair is located at 1.1340. If it closes below this level, the bearish sentiment will strengthen. The next support is at 1.1320 (100-day moving average) and 1.1300 (200-day moving average).
On the other hand, the initial resistance is at 1.1380, and then at 1.1400 and 1.1450.
