US Dollar rebounds despite disappointing US data

• US Dollar Index has staged a modest rebound following the two-day slide.
• EUR/USD still has the potential to test 1.1000 in the near term.
• Wall Street's main indexes stay on the back foot after weak US data.
• Bloomberg reported Chinese Yuan replaced US Dollar as the most traded foreign currency in Russia.

After having suffered heavy losses against its major rivals on Monday and Tuesday, the US Dollar (USD) has staged a rebound early Wednesday. Although the US Dollar Index (DXY) edged lower with the initial reaction to the disappointing macroeconomic data releases from the US, it didn't have a difficult time holding its ground. Renewed concerns over a slowdown in the US economy caused Wall Street's main indexes to open in negative territory and helped USD find demand as a safe haven.

Meanwhile, the CME Group FedWatch Tool shows that there is a stronger-than-60% probability of the US Federal Reserve leaving its policy rate unchanged at the May policy meeting.

Daily digest market movers: US Dollar finds a foothold amid risk aversion 

• Economic activity in the US services sector expanded at a softening pace in March with the ISM Services PMI declining to 51.2 from 55.1 in February.
• The inflation component of the PMI survey, the Price Paid sub-index, edged lower to 69.5 from 65.6 in February. The Employment sub-index fell to 51.3 from 54.
• Employment in the US private sector rose by 145K in March, falling short of analysts' estimate of 200K, ADP's monthly report showed on Wednesday.
• Assessing the data, "our March payroll data is one of several signals that the economy is slowing,” said Nela Richardson, chief economist, ADP. "Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down." 
• The US Bureau of Labor Statistics (BLS) announced on Tuesday that the number of job openings on the last business day of February declined to 9.9 million from 10.5 million in January.
• The US Census Bureau said earlier this week that Factory Orders declined by 0.7% on a monthly basis in February, compared to the market expectation for a decrease of 0.5%.
• Bloomberg reported on Tuesday that Chinese Yuan has surpassed the US Dollar as the most traded currency, in monthly trading volume, for the first time in Russia in February. According to the outlet, the gap has continued to widen in March.
• Last week, Brazil and China have reached an agreement to stop using the US Dollar as an intermediary in trade transactions.  
• 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 1.5 million barrels per day in that period.
• The barrel of West Texas Intermediate (WTI) started the week with a large bullish gap and touched its highest level since late January above $82. Following a consolidation phase, WTI holds comfortably above $80.
• Federal Reserve Bank of St. Louis President James Bullard said on Monday that the unexpected decision by OPEC to lower output could make the Fed’s jobs of bringing inflation down back to 2% target more challenging.
• ISM’s Report on Business revealed on Monday that the headline Manufacturing PMI declined to 46.3 in March from 47.7 in February, revealing a contraction at an accelerating pace in the manufacturing sector’s economic activity.
• The Prices Paid Index of the PMI survey, the inflation component, dropped to 49.2 from 51.3. This reading suggests that input inflation in the sector softened in March.
• The BLS will release Nonfarm Payrolls data on Friday.

Technical analysis: US Dollar struggles to outperfrom Euro

EUR/USD has staged a technical correction but managed to hold above 1.0900 on Wednesday. Nevertheless, the Relative Strength Index (RSI) indicator on the daily chart stays above 60 and the 20-day Simple Moving Average (SMA) continues to move away from the 50-day SMA following the bullish cross earlier this week, reflecting the bullish bias.  

Once EUR/USD clears the 1.0950/1.0960 resistance area and confirms it as support, it could target 1.1000 (end-point of the latest uptrend, psychological level) and 1.1035 (multi-month high set in early February).

On the downside, 1.0800/1.0780 (psychological level, static level, 20-day SMA) aligns as first important support area before 1.0730 (50-day SMA) and 1.0670 (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.