Last week, the US currency noticeably gained weight, strengthening against the euro by almost 1%.

The "fuel" for the growth of the greenback was the data on inflation in the United States, which accelerated to the highest in 30 years in October.

These data fueled expectations of a more rapid tightening of monetary policy by the Federal Reserve and allowed the USD index to break through the 94.50 mark, which the bulls have been besieging since the beginning of October.

Their conquest of the round level of 96.00 was already a matter of technique, but the growth of the US currency stalled around the 95.26 mark.

The greenback retreated from an almost 16-month peak after preliminary data published on Friday by the University of Michigan showed that the US consumer confidence index in November fell to 66.8 points from 71.7 points a month earlier. The fall of the indicator to the lowest level in a decade was primarily caused by concerns about inflation.

Details of the report showed that only 36% of the surveyed households believe that their incomes will grow faster than inflation over the next five years. This share has been steadily declining in the last few months.

Against this background, the EUR/USD pair, which was pushed by the stronger dollar to the lowest levels since July 2020 in the area of 1.1432, was able to find the ground under its feet and ended the last five days near 1.1445.

On Monday, it tried to extend the recovery and even noted local highs in the area of 1.1460, taking advantage of the fact that the optimistic mood of the market led to a weakening of demand for the protective dollar, which sank to 95.00.

This was largely facilitated by positive statistics from China, which reflected that retail sales in the country increased by 4.9% year-on-year in October, exceeding expectations of 3.5%. Industrial production over the same period in China expanded by 3.5% against analysts' estimates of 3%.

Market participants also drew attention to the comments of the President of the Federal Reserve Bank of Minneapolis Neil Kashkari. Over the weekend, he said that the US central bank should not react too violently to temporary factors of inflation growth, adding that he expects price pressure to weaken in the second half of 2022.

The head of the European Central Bank, Christine Lagarde, holds a similar opinion.

"Next year we will see a weakening of inflation, but it will take longer to reduce it than initially expected," she said during her speech in the European Parliament today.

"An untimely tightening of financial conditions is undesirable, it can become an unreasonable obstacle to recovery. It is very unlikely that the conditions for a rate increase will be met in 2022," Lagarde said.

The ECB president's dovish comments put pressure on the EUR/USD pair, which failed to develop a positive momentum and moved into negative territory, aiming for 1.1400.

Monday's economic calendar is poor for interesting releases on the US and the eurozone, so the tone for trading EUR/USD is set by the dynamics of the dollar, which managed to shrug off its early weakness due to an increase in the yield of 10-year treasuries from 1.55% to 1.61%.

A considerable part of the fall in the main currency pair last week was due to the widening of the interest rate differential between EU and US bonds.

"We believe that yield spreads may continue to move against the euro. Investor sentiment towards the single currency is undermined by a growing list of problems that also contribute to the build-up of short positions on EUR. It is expected that the eurozone economy will be more sensitive to both the negative impact of energy prices and the slowdown in real estate prices in China. The number of new COVID-19 cases has been growing again recently in a number of eurozone countries. We expect the ECB to maintain a dovish stance in December. The central bank continues to resist expectations of a rate hike next year," MUFG experts noted.

According to CBA analysts, the dollar will strengthen this week, as expectations of a faster increase in interest rates by the Fed continue to grow. And the tightening of monetary policy, as a rule, is positive for the exchange rate of the corresponding currency.

"The US inflation data released last week is the latest evidence that the growth of prices for basic goods in the United States is accelerating. In this regard, the statistics on the United States, which will be released this week, most likely will not change expectations regarding the tightening of the Fed's monetary policy," they said.

The focus this week will be on US retail sales data, especially after a survey by the University of Michigan last Friday showed that consumer confidence in the country unexpectedly fell to a ten-year low in early November, as high inflation hit sentiment.

"It will be important to keep an eye on what the still-hoarded US consumers are doing rather than saying as sentiment indicators have diverged from actual spending over the summer," strategists at NAB said.

According to forecasts, retail sales in the US in October rose by 1.1% versus September after increasing by 0.7% in September. Evidence of economic recovery, accordingly, is giving the Fed a free hand in scaling back stimulus policies in favor of curbing inflation.

At the same time, the maximum acceleration of inflation in the United States since 1990 may turn out to be far from the limit. Economists expect prices to rise even more sharply in the coming months. So far, neither the excitement in the housing market nor the global energy crisis is abating. This will put the Fed in front of the need to think about tightening its policy at a faster pace, which, according to JPMorgan Chase, the market will see at the end of the regulator's meeting in December.

Thus, the potential for strengthening the American currency has not yet been exhausted, and the risks of a further decline in the EUR/USD pair remain.

Danske Bank analysts are still expecting the dollar to rise in the coming months, and the pair to fall below 1.1000 in the coming year.

"The Fed has begun discussing the timing of raising interest rates and winding down QE, which will start in November. This will continue to change the mood in favor of the USD against the background of the divergence of the monetary policies of the American and European Central Banks," they noted.

The USD is currently trading at 16-month highs. A break above 95.26 would open the door to 95.70 and then 97.80.

As for the EUR/USD pair, if the psychological level of 1.1400 does not hold up, then bears may aim for 1.1370 and 1.1350.

On the other hand, resistance is located at 1.1470, 1.1520 and 1.1550.