US Dollar under bearish pressure after disappointing PMI report

Following the rebound witnessed on Friday, the US Dollar (USD) started the new week on a bullish note and the US Dollar Index (DXY) recovered toward 103.00 during the Asian trading hours. In the second half of the day, however, the disappointing ISM Manufacturing PMI report for March caused the USD to weaken against its rivals. As market participants reassess the US Federal Reserve’s (Fed) rate outlook amid renewed concerns over energy inflation turning uncomfortably high, the DXY stays on the back foot. Meanwhile, Wall Street's main indexes opened higher led by impressive gains witnessed in energy shares following OPEC+ decision to cut oil output. 

Daily digest market movers: US Dollar turns fragile after PMI data

• ISM Manufacturing PMI declined to 46.3 in March from 47.7 in February, revealing that the business activity in the manufacturing sector contracted at an accelerating pace.
• The Prices Paid Index of the PMI survey, the inflation component, dropped to 49.2 from 51.3, compared to the market expectation of 47.5.
• The S&P 500 Energy Index is up more than 5% after the opening bell on Monday.
• The CME Group FedWatch Tool shows that markets are pricing in a nearly 50% probability of the Fed raising its policy rate by 25 basis points (bps) in May, compared to 60% earlier in the day.
• The benchmark 10-year US Treasury bond yield declined below 3.5% with the initial reaction to PMI data.  
• St. Louis Federal Reserve President James Bullard argued on Monday that the Fed needs to lift the policy rate above 5% amid sticky inflation and strong labor market.
• On Sunday, Saudi Arabia announced that several producers in OPEC+ will participate in voluntary output cuts from May to the end of the year. The group’s total output will be reduced by more than 1 million barrels per day in that period.
• OPEC+ panel confirmed following Monday's meeting that the total output cut will be 1.66 million barrels per day.
• The barrel of West Texas Intermediate (WTI) opened with a large bullish gap and touched its highest level since late January above $82.
• NY Fed President John Williams reiterated on Friday that the Fed’s policy decisions will be driven by the incoming data and the progress toward employment and price stability mandates.
• Later in the week, the ISM Services PMI survey, ADP private sector employment data and the US Bureau of Labor Statistics’ March jobs report could influence the USD valuation. 

Technical analysis: US Dollar shows no signs of recovery against Euro

Despite the modest retreat witnessed at the beginning of the week, EUR/USD keeps its bullish following the latest rebound. The Relative Strength Index (RSI) indicator on the daily chart stays near 60 and the pair holds comfortably above the 20-day and the 50-day SMAs, which are about to make a bullish cross. 

On the upside, EUR/USD faces first resistance at 1.0900 (psychological level, static level). If the pair manages to make a daily close above that level and confirms it as support, it could extend its uptrend toward 1.1000 (end-point of the latest uptrend) and 1.1035 (multi-month high set in early February).

EUR/USD’s latest pullback confirmed 1.0800 (psychological level, static level) as support. A daily close below that level could open the door for further losses toward 1.0730 (20-day SMA, 50-day SMA) and the 1.0650/60 area, where the 100-day SMA and the Fibonacci 23.6% retracement of the latest uptrend align.

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation. 

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.