US Dollar performance depends on US inflation report
- US Dollar has found its footing following Tuesday’s pullback.
- EUR/USD near-term technical outlook shows bullish bias stays intact.
- March inflation data from US could significantly impact US Dollar’s performance.
The US Dollar (USD) stays resilient on Wednesday after having weakened against its major rivals on Tuesday. Investors refrain from making large bets while awaiting March Consumer Price Index (CPI) data from the US.
Following a bullish start to the week, the US Dollar Index (DXY) turned south on Tuesday and declined toward 102.00. The mixed performance of Wall Street and the lack of action in the US Treasury bond yields, however, helped the USD limit its losses in the second half of the day. The CME Group FedWatch Tool shows that markets are pricing in a 67% probability of one more 25 basis points Federal Reserve (Fed) rate hike in May. March CPI could trigger a big action in the USD by influencing the Fed’s rate outlook.
Daily digest market movers: US Dollar eyes US inflation report as next catalyst
- 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.
- Previewing the CPI data, “a smaller-than-expected increase will be welcomed and trigger optimism, yet it is worth remembering the Fed’s favorite inflation measure is still the Core PCE Price Index and the effects of CPI on financial boards will likely be short-lived,” says FXStreet Analyst Valeria Bednarik. “On the other hand, higher inflation data could boost concerns and end up favoring the US Dollar due to its safe-haven condition.”
- Economists at ING note that markets are increasingly doubtful that the Fed will be able to hike rates much further but add that the upcoming CPI report could change that stance.
- Earlier in the week, NY Fed’s latest consumer survey revealed that the one-year inflation expectation climbed to 4.7% in March from 4.2% in February.
- 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, “we’ve gotten policy to a restrictive stance, now we need to watch the data on retail sales, CPI and others,” Williams stated.
- The Fed will release the minutes of its March policy meeting later in the session.
- The US Bureau of Labor Statistics reported on Friday that 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%.
Technical analysis: US Dollar looks fragile against the Euro
EUR/USD closed in positive territory above 1.0900 on Tuesday, snapping a two-day losing streak. Although the pair stays relatively quiet early Wednesday, the near-term technical outlook remains bullish with the Relative Strength Index (RSI) indicator on the daily chart holding comfortably above 50. Moreover, the gap between the 20-day Simple Moving Average (SMA) and the 50-day SMA continue to widen following the bullish cross that occurred on April 3.
EUR/USD is likely to face interim 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, 1.0840 (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.