• US Dollar continues to lose value against its major rivals on Tuesday.
• EUR/USD could target 1.1000 once it confirms 1.0900 as support.
• Bloomberg reported Chinese Yuan replaced US Dollar as the most traded foreign currency in Russia.

The US Dollar (USD) stays on the back foot on Tuesday after having registered losses against its major rivals on Monday. Although markets are pricing in a nearly 60% probability of the US Federal Reserve (Fed) raising its policy rate by 25 basis points (bps) in May, the currency is having a hard time finding demand. The risk-positive market atmosphere and news of the USD losing some of its appeal as reserve currency seems to be forcing the US Dollar Index (DXY) to stay on the back foot.

Daily digest market movers: US Dollar on the back foot for the second straight day

• Bloomberg reported on Tuesday that Chinese Yuan has surpassed the US Dollar as the most traded currency, in monthly trading volume, for the first time in Russia in February. According to the outlet, the gap has continued to widen in March.
• Last week, Brazil and China have reached an agreement to stop using the US Dollar as an intermediary in trade transactions.  
• The CME Group FedWatch Tool shows that markets are pricing in a 58% probability of the Fed raising its policy rate by 25 basis points (bps) to the range of 5-5.25% in May.
• On Sunday, Saudi Arabia announced that several producers in OPEC+ will participate in voluntary output cuts from May to the end of the year. The group’s total output will be reduced by more than 1.5 million barrels per day in that period.
• The barrel of West Texas Intermediate (WTI) started the week with a large bullish gap and touched its highest level since late January above $82. Following a consolidation phase, WTI holds comfortably above $80.
• Federal Reserve Bank of St. Louis President James Bullard said on Monday that the unexpected decision by OPEC to lower output could make the Fed’s jobs of bringing inflation down back to 2% target more challenging.
• ISM’s Report on Business revealed on Monday that the headline Manufacturing PMI declined to 46.3 in March from 47.7 in February, revealing a contraction at an accelerating pace in the manufacturing sector’s economic activity.
• The Prices Paid Index of the PMI survey, the inflation component, dropped to 49.2 from 51.3. This reading suggests that input inflation in the sector softened in March.
• Fueled by the upbeat performance of energy shares, the S&P 500 closed in positive territory on Monday.
• US stock index futures trade modestly higher on Tuesday. 
• February Factory Orders and JOLTS Job Openings will be featured in the US economic docket on Tuesday.
• Later in the week, the ISM Services PMI survey, ADP private sector employment data and the US Bureau of Labor Statistics’ March jobs report could influence the US Dollar valuation. 

Technical analysis: US Dollar shows no signs of life against Euro

Despite the modest retreat seen at the beginning of the week, EUR/USD has managed to gather bullish momentum. The Relative Strength Index (RSI) indicator on the daily chart rose above 60 and the 20-day Simple Moving Average (SMA) made a bullish cross with the 50-day SMA. Both of these technical developments suggest that the pair’s bullish bias remains intact and there is more room on the upside before it turns technically overbought.  

EUR/USD trades above 1.0900 (psychological level, static level) and it could target 1.1000 (end-point of the latest uptrend, psychological level) and 1.1035 (multi-month high set in early February) as long as that support holds.

On the downside, 1.0800 (psychological level, static level) aligns as first important support level before 1.0730/1.0750 area (20-day SMA, 50-day SMA) and 1.0660 (100-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.