US Dollar devaluation continues after US inflation data

• US Dollar has continued to weaken against its major rivals following Wednesday’s selloff.
• EUR/USD technical outlook shows that the pair has the potential to renew 2023 highs.
• US Dollar could have a hard time staging a steady rebound as markets eye a looser Fed policy.

The US Dollar (USD) has been struggling to shake off the selling pressure on Thursday after having registered heavy losses against its major rivals on Wednesday. March inflation data from the United States seems to be the primary driver behind the broad-based USD weakness with markets forecasting a strong probability of one or more Federal Reserve (Fed) rate cuts in the second half of the year.   

The US Bureau of Labor Statistics (BLS) reported on Wednesday that 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. 

Daily digest market movers: US Dollar under pressure ahead of PPI data

• The CME Group FedWatch Tool's probability for one more 25 basis points Fed rate increase in May holds above 60%. However, markets see a bigger-than-90% 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 Dollar Index (DXY), which tracks the USD performance against a basket of six major currencies, touched its lowest level since early February below 101.50 after having lost 0.6% on Wednesday.
• Commenting on the 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. 
• The BLS will release the Producer Price Index (PPI) data later in the day, which is forecast to fall to 3% on a yearly basis in March from 4.6% in February. 
• The US Department of Labor’s weekly Initial Jobless Claims will also be featured in the US economic docket.
• 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 further losses vs Euro 

EUR/USD registered strong gains on Wednesday and continued to push higher early Thursday, advancing to its highest level in over two months above 1.1000 in the process. The Relative Strength Index (RSI) indicator on the daily chart is yet to climb above 70, suggesting that the pair has more room on the upside before turning technically overbought.

1.1035 (2023 high) aligns as interim resistance before 1.1100 (psychological level, static level) and 1.1160 (static level from April 2022).

On the downside, a daily close below 1.1000 could discourage buyers and open the door for an extended downward correction toward 1.0900 (psychological level, static level), 1.0850 (20-day Simple Moving Average SMA)) and 1.0800 (psychological level, static level).

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.