The US Dollar (USD) started this week under bearish pressure as easing fears over a global financial crisis allowed investors to move toward risk-sensitive assets. After having closed the previous two weeks in negative territory, the US Dollar Index (DXY) continued to push lower and came within a touching distance of 102.00 before staging a modest rebound early Friday. Renewed expectations about the US Federal Reserve (Fed) pausing its tightening cycle at the upcoming meeting also put additional weight on the USD shoulders.
On Friday, the USD staged a technical correction against its major rivals but lost some of its strength after softer-than-expected inflation data. The US Bureau of Economic Analysis reported that the Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, declined to 4.6% on a yearly basis in February from 4.7% in January. On a monthly basis, Core PCE inflation rose 0.3%, compared to the market expectation of 0.4%. Nevertheless, the DXY remains on track to end the third straight week in negative territory and has lost more than 2% in the month of March.
EUR/USD bullish bias stays intact in the near term with the Relative Strength Index (RSI) indicator on the daily chart holding near 60. This technical reading also suggests that the pair has more room on the upside before turning overbought. Additionally, the pair continues to trade above the 50-day Simple Moving Averages after having tested it toward the end of the previous week.
1.0900 (psychological level, static level) aligns as key technical level for EUR/USD. If the pair manages to stabilize above that level, it could target 1.1000 (end-point of the latest uptrend) and 1.1035 (multi-month high set in early February).
On the downside, 1.0800 (psychological level) could be seen as interim support ahead of 1.0730 (50-day SMA, 20-day SMA) and 1.0650/60, where the 100-day SMA and the Fibonacci 23.6% retracement of the latest uptrend is located. A daily close below the latter could be seen as a significant bearish development and open the door for an extended slide toward 1.0500 (psychological level) and 1.0460 (Fibonacci 38.2% retracement).
Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index should rise while the broad S&P 500 Index declines, revealing an inverse correlation.
During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.
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EUR/USD is up on Friday, trading near the 1.0900 area. The US Dollar received support during the American session from higher Treasury yields and mixed market sentiment. The pair is on its way to the highest weekly close since August.
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