US Dollar under pressure, Brazil’s Lula urges countries to ditch USD in trade

• US Dollar is struggling to find demand ahead of the weekend amid weak US data.
• Brazil President does not want to use US Dollar in international trade transaction.
• EUR/USD technical outlook shows that the pair could stage a technical correction in the short term.

The US Dollar (USD) stays on the back foot ahead of the weekend after having suffered large losses against its major rivals throughout the week. 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 been causing the currency to lose its value.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, touched its lowest level in over a year below 101.00 and is yet to stage a rebound.

Daily digest market movers: US Dollar eyes key US data releases

• 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 US Census Bureau will release Retail Sales data for March, which is forecast to show a 0.4% contraction on a monthly basis.
• The Fed will publish Industrial Production figures for March and the University of Michigan’s will release the preliminary Consumer Sentiment Survey for April.
• The CME Group FedWatch Tool's probability for one more 25 basis points Fed rate increase in May holds near 70%. However, markets see a 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 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 could limit losses against Euro in near term

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).

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.