US Dollar holds its ground, oil prices slide on worsening demand outlook

• US Dollar stays resilient against its major rivals in the second half of the week.
• Crude oil prices slide on worsening demand outlook, stronger USD.
• USD could react to macroeconomic data releases from the United States in the American session.

The US Dollar (USD) keeps its footing following Wednesday’s modest rebound as investors continue to stay away from risk-sensitive assets. Meanwhile, the renewed USD strength and growing concerns over a worsening demand outlook drag crude oil prices lower. Signs of sticky inflation in major economies remind market participants that central banks could cling to tight monetary policies at the cost of a slowdown in activity.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, stays in a tight range near 102.00 on Thursday. On a weekly basis, the index stays in positive territory, looking to snap a five-week losing streak. 

Daily digest market movers: US Dollar awaits macroeconomic data releases from US

• The US Department of Labor will release the weekly Initial Jobless Claims data on Thursday, which is forecast to tick up to 240,000.
• March Existing Home Sales and the Federal Reserve Bank of Philadelphia’s Manufacturing Survey will also be featured in the US economic docket. 
• Stronger-than-expected Consumer Price Index (CPI) data from the UK revived fears over sticky global inflation and triggered a rally in global bond yields.
• The benchmark 10-year US Treasury bond yield turned north early Wednesday and climbed to its highest level in nearly a month above 3.6% before going into a consolidation phase slightly below that level on Thursday.
• Crude oil prices fell sharply on Wednesday and the barrel of West Texas Intermediate lost more than 2%. WTI stays under selling pressure and trades at its lowest level in over two weeks below $78.
• The Federal Reserve’s Beige Book showed late Wednesday that manufacturing activity was widely reported as flat or down even as supply chains continued to improve. “Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing,” the publication further read.
• “After the failure of two large regional Fed banks last month roiled the financial sector, I’m waiting to see whether there are other credit shoes to drop,” said Chicago Federal Reserve Bank President Austan Goolsbee in an interview with American Public Media's Marketplace on Wednesday.
• NY Fed President John Williams reiterated that it was too early to assess the economic impact of tighter credit conditions and added that they need to continue to use policy tools to restore price stability.  
• St. Louis Federal Reserve President James Bullard told Reuters on Tuesday that interest rates will need to continue to rise in the absence of clear progress on inflation. Bullard further noted that he is still seeing the "adequately restrictive policy rate" at 5.50%-5.75% range and added that is biased to hold rates there for longer until inflation is contained.
• Housing Starts in the US declined by 0.8% on a monthly basis in March following February's increase of 7.3% (revised from 9.8%). In the same period, Building Permits decreased by 8.8%, compared to the market expectation of +1.45%. 
• The data from China showed on Tuesday that the world’s second-largest economy expanded by an annualized rate of 4.5% in the first quarter, much stronger than the 2.9% growth recorded in the last quarter of 2022. This reading also came in better than analysts' estimate for an expansion of 4%. Other data revealed that Industrial Production expanded by 3.9% and Retail Sales rose by 10.6% on a yearly basis, compared to analysts' estimate of 7.4%.
• Richmond Fed President Thomas Barkin said on Monday that he wants to see more evidence of inflation settling back to target.

Technical analysis: US Dollar Index stays below key resistance

The US Dollar Index trades slightly below the 20-day Simple Moving Average (SMA), currently located at 102.20. In case the DXY closes the day above that level, it could target 103.00 (static level, psychological level) and 103.50 (50-day SMA, 100-day SMA). 

Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart moves sideways near 50, suggesting that sellers refrain from committing to further USD weakness. 

On the downside, 101.50 (static level) align as interim support ahead of 101.00/100.80 (psychological level, static level, multi-month low set on April 14). A daily close below that support area could open the door for an extended slide toward 100.00 (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.