The US Dollar Index (DXY), which measures the USD against six major currencies, is steady around the 100.00 mark after recovering from a recent low of 99.50. However, the potential for significant gains is limited due to ongoing fiscal uncertainty in the US. The House’s approval of President Trump’s tax bill has raised worries about rising US debt, which is projected to increase by nearly $3 trillion over the next ten years. Moody’s responded by downgrading the US credit rating to Aa1, impacting market confidence.

Impact of Trade Negotiations

Ongoing trade talks have also hurt market confidence, creating a risk-averse environment. However, positive economic data has provided some support, with the S&P Global Flash Composite PMI rising to 52.1 in May, indicating growth in business activity. From a technical standpoint, the Dollar Index is in a corrective phase below the 21-day EMA at 100.40. Momentum indicators present a mixed picture: the RSI is around 45.79, and the MACD shows weak bullish sentiment. The 99.50 level is critical support, and if it breaks, further downside risk may develop. Broadly, we are seeing a balancing act between political developments and economic resilience. While the Dollar Index has shown some ability to recover, meaningful gains in the near future seem limited. The downgrade from Moody’s has made traders more cautious with their dollar investments. Although the move to Aa1 may not heavily impact positions, it raises concerns about long-term fiscal responsibility. The congressional approval of the tax bill has curiously failed to boost enthusiasm for the dollar. Although it aims to promote growth, the expected $3 trillion deficit over a decade raises questions about the sustainability of US fiscal policy. These concerns are affecting demand for the USD, especially for safe, yield-stable investments.

Sentiment and Economic Performance

Trade discussions are still at a standstill. As the deadlock continues, investors are becoming more cautious about assets linked to high policy uncertainty. This hesitance has reduced risk-taking that relies on US dollar strength. The market has turned more defensive, especially with larger funds rotating out of speculative long positions. Despite this, stronger-than-expected PMI composite performance—rising to 52.1—indicates that the business sector is still growing. This reading, above 50, suggests growth in both manufacturing and services, which has somewhat cushioned the downside. This explains the reluctance to completely abandon the USD; there is still some faith in the underlying economy amid political noise. Technically, the price range is tightening as it hovers below the 21-day EMA. An RSI near 45 indicates slight bearish sentiment but lacks strong momentum, while the MACD remains barely above its signal line. The support level at 99.50 has held twice this month, but deeper closes below that could invite selling pressure and compel momentum-based systems to unwind long positions. Currently, the compression beneath the moving average may signal increased volatility. With mixed indicators, it seems we are in a wait-and-see phase, leaning downward unless we see political clarity or improved macro data. For now, traders should prepare for increased two-way risk. Moves around headlines could trigger algorithmic reactions, particularly in shorter-term derivatives. If the support level breaks, we might see a drop towards 98.80 in subsequent sessions. Sentiment remains sensitive to daily news, and even minor deviations in expected data can provoke intraday shifts. For those utilizing leveraged strategies, focusing on key liquidity points between 99.50 and 100.40 may be more effective than making directional bets. Traders should be ready to adjust their expectations quickly, especially if views on economic data trends or debt sustainability change. The short-term market rhythm is driven more by tactical responses to conflicting signals than by a strong consensus. Create your live VT Markets account and start trading now.

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