- 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.
Previewing the potential impact of the US CPI data on the USD, "the USD's downtrend could stall a bit in the short-term, aided by the expectations of another Fed hike next month," said TD Securities analysts. "However, much will hinge on the near-term data releases, especially the March CPI print."
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 Index under bearish pressure on Tuesday
- 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. On Tuesday, Willimas acknowledged that they will have to lower rates if inflation were to come down.
- In its World Economic Outlook report, the International Monetary Fund said that it expecs the global real Gross Domestic Product (GDP) to grow by 2.8%, down from 2.9% in January's report.
- 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 Tuesday.
- 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 likely to continue to weaken 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).
What is US Dollar Index (DXY)?
The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).
With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.
US Dollar F.A.Q.
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the 'de facto' currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world's reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed's 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed's weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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