US Dollar stabilizes ahead of Nonfarm Payrolls report

• US Dollar stays relatively resilient against its major rivals on Thursday.
• EUR/USD technical outlook remains bullish but there is a loss of momentum.
• Nonfarm Payrolls report for March could significantly influence US Dollar’s valuation.

The US Dollar (USD) manages to hold its ground in the second half of the week after having suffered heavy losses against its major rivals earlier. The USD seems to be finding demand as a safe haven as investors grow increasingly concerned about the United States (US) economy tipping into recession. Nonfarm Payrolls (NFP) report for March, which will be released on Friday, could influence the market positioning regarding the US Federal Reserve’s next policy step and impact the USD’s performance.

The US Dollar Index, which gauges the USD’s valuation against a basket of six currencies, holds steady at around 102.00 after having touched its weakest level since early February below 101.50 early Wednesday.

Daily digest market movers: US Dollar holds its ground ahead of key data releases

• Federal Reserve Bank of Atlanta’s GDPNow model’s estimate for the first-quarter real Gross Domestic Product Growth (GDP) declined to 1.5% following Wednesday’s data releases.
• Nonfarm Payrolls in the US is forecast to rise by 240,000 following February’s impressive increase of 311,000. The Unemployment Rate in the US is expected to hold steady at 3.6%.
• Assessing the potential impact of the US jobs report on the USD’s valuation, “with the ISM Manufacturing Employment Index down at 46.9, there is growing evidence that the positive demand in the US labour market is now beginning to fade,” noted economists at MUFG Bank “If that is confirmed on Friday by a weaker than expected Nonfarm Payrolls report it will likely result in a more substantial depreciation of the US Dollar.”
• 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.
• Commenting on 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.
• Bloomberg reported on Tuesday that the 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.
• 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.

Technical analysis: US Dollar is yet to outperform Euro in a convincing way

Despite Wednesday’s pullback, EUR/USD’s near-term technical outlook stays bullish with the Relative Strength Index (RSI) on the daily chart holding comfortably above 50. Moreover, the 20-day Simple Moving Average (SMA) continues to pull away from the 50-day SMA following the bullish cross seen earlier in the week.  

1.0900 (psychological level, static level) aligns as immediate support for EUR/USD. If the pair falls below that level and starts using it as support, it could extend its downward correction toward 1.0800 (psychological level, 20-day SMA), 1.0740 (50-day SMA) and 1.0680 (100-day SMA).

On the upside, static resistance seems to have formed at 1.0950 ahead of 1.1000 (end-point of the latest uptrend, psychological level) and 1.1035 (multi-month high set in early February).

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.