US Dollar selloff continues as Wall Street opens higher

• US Dollar resumes the downside following Tuesday’s correction.
• Top-tier economic data and tech earnings from the United States this week to affect USD valuation.
• Downside appears compelling for the US Dollar Index amid the bearish daily technical setup.

The United States Dollar (USD) is back in the red after a temporary rebound seen on Tuesday. An improving market mood appears to be weighing on the US Dollar’s safe-haven appeal. Wall Street's main indexes opened in positive territory on Wednesday, led by a more-than-1% increase in the tech-heavy Nasdaq Composite Index as investors cheered better-than-expected earnings from Microsoft and Alphabet. 

However, concerns over the US debt ceiling continue to linger alongside the banking sector fears, as investors gear up for the release of the top-tier United States data. Earnings from the US tech giant, Meta, will also garner attention later in the American session.

On the macroeconomic front, the first quarter Gross Domestic Product (GDP) and April Personal Consumption Expenditures (PCE) Price Index will be closely scrutinized in the second half of this week.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, is down more than 0.5% on Wednesday, closing in on 101.00.

Daily digest market movers: US Dollar fails to benefit from upbeat US data

• Durable Goods Orders in the US increased by 3.2%, or $8.6 billion, in March to $276.4 billion, the US Census Bureau announced on Wednesday. This reading followed February's contraction of 1.2% (revised from -1%) and came in much better than the market expectation for an increase of 0.8%.
• On Tuesday, the European Central Bank (ECB), the Bank of Japan (BoJ), the Bank of England (BoE) and the Swiss National Bank (SNB) announced in a joint statement that they will reduce the frequency of their dollar operations with the Fed from May 1 as the volatility in financial markets has receded.
• Consumer sentiment in the US weakened modestly in April with the Conference Board's Consumer Confidence Index edging lower to 101.3 from 104.0 in March (revised from 104.2).
• Wall Street's main indices tumbled on resurfacing US banking jitters after the troubled US bank, First Republic Bank, shares slumped 50%. The bank said it lost customer deposits of $102 billion in the first quarter.
• Concerns grew over the approaching US debt ceiling deadline after the House Rules Committee unexpectedly went into recess, delaying a Republican bill authorizing a $1.5 trillion increase to the US debt ceiling. The panel will return early Wednesday.
• 10-year US Treasury bond yields attempts a minor recovery after shedding nine basis points (bps) on Tuesday.
• Markets are currently pricing a roughly 75% probability of a 25 bps Fed rate hike next week, down from about a 90% probability seen at the start of this week.
• The Fed is in the blackout period ahead of its May 3 monetary policy announcements.
• Earnings from US tech giant Meta and the Durable Goods Orders data will be on the cards this Wednesday.
• The US Bureau of Economic Analysis will unveil the first estimate of first-quarter GDP growth on Thursday. The US economy is forecast to expand at an annualized rate of 2% in Q1, down from the 2.6% recorded in the last quarter of 2022.

Technical analysis: US Dollar Index stays under bearish pressure 

The US Dollar Index (DXY) is turning south after failing to clear the 102.00 key level. Tuesday’s rebound from the weekly trough is fading, as sellers are fighting back control.

The bearish 21-Day Moving Average (DMA), now at 101.89, continued to limit bullish attempts. It is worth noting that the index has failed to settle above the 21 DMA since March 15 on a daily candlestick closing basis.

The 14-day Relative Strength Index (RSI) is pointing south while below the midline, justifying the ‘sell on rise’ trades seen in the US Dollar Index. The DXY is already below the previous day’s low of 101.19 and is likely to test bullish commitments at 101.00. A deeper decline toward 100.00 will seek validation from the multi-month low reached on April 14 at 100.78.

Alternatively, acceptance above the 21 DMA hurdle will likely initiate a fresh upswing toward the 102.50 psychological barrier, beyond which the confluence of the downward-sloping 50 and 100 DMAs at around 103.25 will be on buyers’ radars.

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.