US Dollar loses strength ahead of key US CPI data

• US Dollar weakens against its major rivals following the Easter holiday.
• EUR/USD holds above key support despite the latest pullback.
• March CPI data from US could significantly impact US Dollar’s valuation.

The US Dollar (USD) stays on the back foot on Tuesday and weakens against its major rivals as investors gear up for the highly anticipated March Consumer Price Index (CPI) data from the US. The US Dollar Index, which closed the previous four trading days in positive territory, retreats toward 102.00, reflecting the lack of demand for the currency.  

Ahead of the weekend, the USD gathered strength as investors started to price in a 25 basis points (bps) US Federal Reserve (Fed) rate hike in May on the back of the upbeat March jobs report. With trading conditions normalizing after a long weekend, however, US Treasury bond yields started to push lower, making it difficult for the USD to continue to outperform its peers. Moreover, the improving risk mood seems to be putting additional weight on the USD’s shoulders.

Daily digest market movers: US Dollar struggles to remain attractive

• Nonfarm Payrolls in the US rose by 236,000 in March, slightly below the market expectation of 240,000. February’s print of 311,000 got revised higher to 326,000 from 311,000.
• Wage inflation in the US, as measured by Average Hourly Earnings, declined to 4.2% on a yearly basis from 4.6% in February. The Unemployment Rate ticked down to 3.5% with the Labor Force Participation Rate improving to 62.6% from 62.5%.
• The CME Group FedWatch Tool shows that markets are pricing in a 67% probability of a 25 bps Fed rate increase in May, compared to 73% on Monday.
• Federal Reserve Bank of Atlanta’s GDPNow model’s estimate for the first-quarter real Gross Domestic Product Growth (GDP) in the US rose to 2.2% from 1.5% on April 10.
• NY Fed President John Williams argued on Monday that the pace of Fed rate increases was not behind the issues surrounding the two collapsed banks back in March.
• NY Fed’s latest consumer survey revealed that the one-year inflation expectation climbed to 4.7% in March from 4.2% in February.
• Minneapolis Fed President Neel Kashkari, Philadelphia Fed President Patrick Harker and Chicago Fed President Austan Goolsbee will be delivering speeches on Monday.
• Inflation in the US, as measured by the Consumer Price Index (CPI) is forecast to decline to 5.2% in March from 6% in February. The Core CPI, which excludes volatile food and energy prices, is expected to rise by 0.4% on a monthly basis, compared to the 0.5% increase recorded in February. 

Technical analysis: US Dollar turns bearish against Euro 

EUR/USD closed in negative territory in the previous two trading days and touched its lowest level in a week at 1.0830 late Monday. The pair, however, managed to regain its traction on Tuesday and rose above the 1.0900 area. The pair’s near-term technical outlook remains bullish with the Relative Strength Index (RSI) indicator on the daily chart holding above 50. Moreover, EUR/USD has reversed its direction after coming in within a touching distance of the 20-day Simple Moving Average, which currently aligns as immediate support at 1.0830.

In case EUR/USD stabilizes above 1.0900, it is likely to face resistance at 1.0950 (static level) before targeting 1.1000 (end-point of the latest uptrend, psychological level) and 1.1035 (multi-month high set in early February).

On the downside, 1.0830 (20-day SMA) aligns as first support before 1.0800 (psychological level), 1.0740 (50-day SMA) and 1.0700 (100-day SMA).

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.