US Dollar under pressure to start new week ahead of critical Fed publication

• US Dollar stays under modest bearish pressure at the beginning of the week.
• US Dollar Index registered losses last week despite upbeat April jobs report.
• The Fed's Loan Office Survey could impact USD's performance on Monday.

The US Dollar (USD) struggles to find demand on Monday and the US Dollar Index (USD) stays within a touching distance of the multi-month low it set below 101.00 on April 14. Investors will pay close attention to the US Federal Reserve's (Fed) Senior Loan Officer Opinion Survey, which could shed a light on the impact of tight monetary policy on financing conditions, for the first quarter later in the day. This publication could drive the USD's performance against its rivals in the late American session.

The Fed's dovish language in the policy statement in the face of banking woes caused the USD to weaken in the second half of the week. Ahead of the weekend, financial shares registered decisive recovery gains and the USD found it difficult to hold its ground amid improving risk mood.

Daily digest market movers: US Dollar fails to benefit from upbeat jobs report

• The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose by 253,000 in April, surpassing the market expectation of 179,000 by a wide margin. On a negative note, March's 236,000 increase got revised lower to 165,000.
• The Unemployment Rate ticked down to 3.4% in April and the annual wage inflation, as measured by the Average Hourly Earnings, edged higher to 4.4% from 4.3%. 
• Assessing the labor market data, “since spring 2022, labor supply has increased, but labor demand has not. There are no job vacancy statistics for April," said Ulrich Leuchtmann, Head of FX and Commodity at Commerzbank. "However, there is no reason to believe that the high number of new hires is anything other than a continuation of this trend: that vacancies are being filled. However, this would not argue for increased monetary policy pressure and thus for higher USD carry and a stronger Dollar." 
• The financial-heavy Dow Jones Industrial Average gained 1.65% on Friday and the Nasdaq Composite rose nearly 2%. 
• The US economic docket will feature Wholesale Inventories data for March.
• Market participants will also keep a close eye on comments from Fed officials.
• The benchmark 10-year US Treasury bond yield holds steady above 3.4% following Friday's rebound.
• US stock index futures trade mixed during the European trading hours on Monday.
• The CME Group FedWatch Tool shows that markets are pricing in a more than 90% probability of the Fed leaving its policy rate unhanged at the next policy meeting.
• The BLS will release the Consumer Price Index (CPI) data for April on Wednesday.

Technical analysis: US Dollar Index shows no signs of a recovery

The US Dollar Index (DXY) remains technical bearish in the near term with the Relative Strength Index (RSI) indicator on the daily chart staying below 50. Additionally, the DXY ended the week below the 20-day Simple Moving Average (SMA) despite having climbed above that level on Friday.

On the downside, 101.00 (static level, psychological level) aligns as first support ahead of 100.00 (psychological level, static level) and 99.50 (static level from March 2022).

The 20-day SMA forms dynamic resistance at 101.60 ahead of 102.00 (psychological level) and 102.70 (50-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.