US Dollar rises on Fed commentary, Brazil’s Lula looks to stop using USD in trade

US Dollar shook off the selling pressure in the American session on Friday.
Brazil President does not want to use US Dollar in international trade transactions.
EUR/USD technical outlook shows that the pair could stage a technical correction in the short term.

The US Dollar (USD) managed to recover some of its weekly losses on Friday on the back of hawkish comments from Federal Reserve (Fed) officials. The US Dollar Index (DXY), which tracks the USD's performance against a basket of six major currencies, rebounded from the one-year low it touched below 101.00 earlier in the day.

Soft inflation data from the United States, growing expectations for a Federal Reserve policy shift amid signs of economic slowdown and loudening calls to move away from the USD in trade transactions have caused the currency to lose its value throughout the week.

Daily digest market movers: US Dollar gains traction ahead of the weekend

The US Census Bureau's monthly publication showed on Friday that Retail Sales in the US declined by 1% on a monthly basis in March following February's 0.2% contraction.
Federal Reserve Governor Christopher Waller argued on Friday that the recent data show that the Fed hasn't made much progress on its inflation goal and added that rates need to rise further. "Monetary policy will need to remain tight for a substantial period, and longer than markets anticipate," Waller added.
While speaking at the inauguration ceremony of President Dilma Rousseff at the New Development Bank – formerly known as the BRICS bank – in Shanghai, Brazil President Luiz Inacio Lula Da Silva questioned why all countries have to use the US Dollar in their trade transactions. "Why can't a bank like BRICS have a currency that can finance the trade relationship between Brazil and China, between Brazil and other BRICS countries?" said Lula, adding to growing calls to look for an alternative currency to trade with.
The CME Group FedWatch Tool's probability for one more 25 basis points Fed rate increase in May sits above 80%. However, markets see a stronger than 80% % chance that the Fed will lower its policy rate back to the range of 4.75%-5% by September, even if it opts for a rate hike at the upcoming meeting.
The US Department of Labor's weekly publication revealed on Thursday that there were 239,000 Initial Jobless Claims in the week ending April 8, up from 228,000 in the previous week.
The US Bureau of Labor Statistics (BLS) reported on Wednesday that the Consumer Price Index (CPI) declined to 5% on a yearly basis in March from 6% in February. This reading came in below the market expectation of 5.2%. Furthermore, the Core CPI, which excludes volatile food and energy prices, rose by 0.4% on a monthly basis, down from a 0.5% increase recorded in February.
On Thursday, the BLS announced that the Producer Price Index (PPI) for final demand in the US declined to 2.7% on a yearly basis in March from 4.9% in February (revised from 4.6%). On a monthly basis, the PPI and the Core PPI came in at -0.5% and -0.1%, respectively, triggering a fresh leg of USD selloff.
Commenting on the CPI inflation data, "the beginning of the end of rate hikes – or the beginning of the countdown toward slashing borrowing costs? That seems to be the message from markets, which are rushing forward to price the next moves of the Federal Reserve (Fed)," noted FXStreet analyst Yohay Elam. "The world's largest economy is experiencing a "process of disinflation" that is somewhat frustrating but is on the right track. Markets are buying it."
San Francisco Federal Reserve Bank President Mary Daly said on Wednesday that the strength of the US economy and elevated inflation suggests that they have more work to do on rate hikes.
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.
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 US Bureau of Labor Statistics reported on Friday, April 7, 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 eyes correction vs. Euro

EUR/USD extended its rally on Thursday and touched its highest level since early April above 1.1050. The pair seems to have gone into a consolidation phase early Friday and the near-term technical outlook suggests that the pair is about to turn overbought with the Relative Strength Index (RSI) indicator on the daily chart holding near 70.

In case EUR/USD pair stages a technical correction, 1.1000 (psychological level, former resistance) aligns as initial support before 1.0900 (20-day Simple Moving Average (SMA) and 1.0750 (50-day SMA).

On the upside, first resistance is located at 1.1100 (psychological level, static level) before 1.1160 (static level from April 2022) and 1.1200 (psychological level).

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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