US Dollar Finds Its Footing Ahead Of Key Inflation Data

The US Dollar (USD) started the new week under bearish pressure as easing fears over a global financial crisis allowed investors to move toward risk-sensitive assets. After having closed the previous two weeks in negative territory, the US Dollar Index continued to push lower and came within a touching distance of 102.00 before staging a modest rebound early Friday.

Renewed expectations about the US Federal Reserve (Fed) pausing its tightening cycle at the upcoming meeting also put additional weight on the USD shoulders. On Friday, the US Bureau of Economic Analysis will publish the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation.

PCE inflation figures could significantly impact the USD performance against its major rivals as the first quarter comes to an end.

Daily Digest Market Movers: US Dollar Awaits Inflation Data

  • Annual Core PCE Price Index is forecast to hold steady at 4.7% in February.
  • Previewing the upcoming PCE inflation data, “if the Core PCE remained elevated in February, it would be bad news for the Fed. FOMC members would be in a complex spot battling inflation (with higher interest rates) while facing a crisis in the banking,” said FXStreet Analyst Matias Salord.
  • The US Bureau of Economic Analysis announced on Thursday that it revised the annualized Gross Domestic Product (GDP) growth for the fourth quarter to 2.6% from 2.7% in the previous estimate.
  • Brazil and China have reportedly reached an agreement to ditch the US Dollar as an intermediary in trade transactions. 
  • US stock index futures trade flat early Friday. On Thursday, Wall Street’s main indexes closed in positive territory.
  • The US Department of Labor’s weekly data revealed that Initial Jobless Claims rose by 7,000 to 198,000 in the week ending March 25.
  • The Conference Board’s monthly data showed on Tuesday that the Consumer Confidence Index rose modestly in March while the one-year inflation expectation component edged slightly higher to 6.3%.
  • The benchmark 10-year US Treasury bond yield has been moving sideways between 3.5% and 3.6% following Monday’s decisive rebound.
  • While speaking on Monday, Federal Reserve Governor Philip Jefferson refrained from sharing his view about whether the Fed should continue raising interest rates.
  • China’s Taiwan Affairs Office threatened retaliation over Taiwan President Tsai Ing-wen’s visit to the US on Wednesday.
  • FOMC Chairman Jerome Powell reportedly told the Republican Study Committee on Wednesday that they intend to raise the policy rate one more time before the end of the year.
  • CME Group FedWatch Tool shows that markets are pricing in a 45% possibility that the Fed will leave its policy rate unchanged in May.
  • Inflation in Germany, as measured by the Consumer Price Index (CPI), declined to 7.4% on a yearly basis from 8.7% in February but came in above the market expectation of 7.3%. In the Eurozone, the annual Harmonized Index of Consumer Prices (HICP) ticked up to 5.7% in March from 5.6% in February.
  • FDIC issued a statement over the weekend announcing that First Citizens BancShares Inc bought all the loans and deposits of SVB.

Technical Analysis: US Dollar Remains Technically Bearish Against Euro

EUR/USD bullish bias stays intact in the near term with the Relative Strength Index (RSI) indicator on the daily chart holding near 60. This technical reading also suggests that the pair has more room on the upside before turning overbought. Additionally, the pair continues to trade above the 50-day Simple Moving Averages after having tested it toward the end of the previous week.

1.0900 (psychological level, static level) aligns as key technical level for EUR/USD. If the pair manages to stabilize above that level, it could target 1.1000 (end-point of the latest uptrend) and 1.1035 (multi-month high set in early February).

On the downside, 1.0800 (psychological level) could be seen as interim support ahead of 1.0730 (50-day SMA, 20-day SMA) and 1.0650/60, where the 100-day SMA and the Fibonacci 23.6% retracement of the latest uptrend is located. A daily close below the latter could be seen as a significant bearish development and open the door for an extended slide toward 1.0500 (psychological level) and 1.0460 (Fibonacci 38.2% retracement).

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 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.

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