US Dollar struggles to attract investors as mood remains upbeat

• US Dollar stays on the back foot as risk flows dominate the financial markets.
• EUR/USD bullish bias stays intact in the near term.
• PCE inflation data from the US could trigger the next big action in the US Dollar.

The US Dollar (USD) started the new week under bearish pressure as easing fears over a global financial crisis allowed investors to move toward risk-sensitive assets. After having closed the previous two weeks in negative territory, the US Dollar Index continued to push lower and broke below 103.00. Renewed expectations about the US Federal Reserve (Fed) pausing its tightening cycle at the upcoming meeting also put additional weight on the USD shoulders. On Friday, the US Bureau of Economic Analysis will publish the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation. PCE inflation figures could significantly impact the USD performance against its major rivals.

Daily digest market movers: No love for US Dollar

• FDIC issued a statement over the weekend announcing that First Citizens BancShares Inc bought all the loans and deposits of SVB. 
• While speaking on Monday, Federal Reserve Governor Philip Jefferson refrained from sharing his view about whether the Fed should continue raising interest rates.
• The Conference Board’s monthly data showed on Tuesday that the Consumer Confidence Index rose modestly in March while the one-year inflation expectation component edged slightly higher to 6.3%. 
• Previewing the upcoming PCE inflation data, “if the Core PCE remained elevated in February, it would be bad news for the Fed. FOMC members would be in a complex spot battling inflation (with higher interest rates) while facing a crisis in the banking,” said FXStreet Analyst Matias Salord. 
• The benchmark 10-year US Treasury bond yield rose above 3.5% at the beginning of the week but struggled to extend its rebound.
• China's Taiwan Affairs Office threatened retaliation over Taiwan President Tsai Ing-wen's visit to the US on Wednesday.
• FOMC Chairman Jerome Powell reportedly told the Republican Study Committee on Wednesday that they intend to raise the policy rate one more time before the end of the year.
• Wall Street’s main indexes rose sharply on Wednesday led by strong gains witnessed in technology shares. 
• The market mood remains upbeat early Thursday with major European equity indexes opening decisively higher.
• US Bureau of Economic Analysis will release its final revision to fourth-quarter Gross Domestic Product (GDP) growth on Thursday. The US Department of Labor will publish the weekly Initial Jobless Claims report.

Technical analysis: US Dollar could have a hard time outperforming Euro

EUR/USD bullish bias stays intact in the near term with the Relative Strength Index (RSI) indicator on the daily chart holding near 60. This technical reading also suggests that the pair has more room on the upside before turning overbought. Additionally, the pair continues to trade above the 20-day and the 50-day Simple Moving Averages after having tested them toward the end of the previous week. 

EUR/USD faces first resistance at 1.0900 (psychological level, static level). If the pair manages to rise above that level and starts using it as support, it could target 1.1000 (end-point of the latest uptrend) and 1.1035 (multi-month high set in early February).

On the downside, 1.0800 (psychological level) aligns as interim support ahead of 1.0730 (50-day SMA, 20-day SMA) and 1.0650/60, where the 100-day SMA and the Fibonacci 23.6% retracement of the latest uptrend is located. A daily close below the latter could be seen as a significant bearish development and open the door for an extended slide toward 1.0500 (psychological level) and 1.0460 (Fibonacci 38.2% retracement).

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.