The US Dollar Index (DXY) is steady around 98.15 early in the European session. Traders are waiting for the US Federal Reserve’s decision on interest rates, which is expected this Wednesday amid rising tensions in the Middle East. Recent inflation data suggests there is an 80% chance of a rate cut from the Federal Reserve in September, with another possibly in October. The upcoming FOMC Press Conference will likely shed more light on this situation.

Consumer Sentiment Improves

Consumer sentiment in the US improved for the first time in six months in June. The University of Michigan’s Index rose to 60.5, exceeding forecasts of 53.5, which may temporarily support the US Dollar. The conflict between Israel and Iran has been ongoing for four days, marked by missile launches from both sides. Increased geopolitical tensions may lead to more safe-haven flows, benefiting the USD. The US Dollar makes up over 88% of global foreign exchange turnover and became the world’s reserve currency after World War II. The Federal Reserve’s monetary policy has a major influence on the dollar’s value. Tools like quantitative easing (QE) and quantitative tightening (QT) affect the flow of credit and the dollar’s strength. Economic indicators and geopolitical risks continue to impact the USD’s direction.

Impact of Federal Reserve Policy

The Dollar Index holding around 98.15 is not surprising, given the current economic and political uncertainties. Markets are currently calm, but this “waiting period” is likely before a series of important releases and clarifications from policymakers. The level of 98.15 suggests hesitation among traders, who are holding off on major moves until more guidance from the Fed is provided. With inflation trends appearing softer, many are now expecting two rate cuts, one in September and another in October. Current market expectations indicate that this is becoming the primary scenario, not just a possibility. Whether this is seen as too aggressive or reasonable may depend less on the Consumer Price Index and more on how the Fed discusses overall economic health. If Jerome Powell expresses caution or suggests that disinflation is not secure, expectations may adjust rapidly. We will keep a close watch on the press conference for its tone rather than just the numbers. The encouraging consumer sentiment data, breaking a six-month trend of decline, is significant. It indicates that households may feel more confident, possibly due to stabilizing prices or labor market support. The University of Michigan Index exceeding 60 is much higher than the predicted 53.5, giving the Fed room to delay rate cuts if they decide to. However, this could also create pressure on expectations for rate-sensitive assets. At the same time, the ongoing situation in the Middle East is influencing the market more than domestic data. Currency flows show heightened risk aversion, which generally supports the dollar, especially in short-term futures. The likelihood of further escalation and how long the current tensions last will likely keep demand strong for liquid and reliable assets. We’ve seen this pattern before when conflicts escalate without resolution. When considering the long-term direction of the dollar, all roads lead back to Fed policy. The USD is involved in over 88% of global currency turnover, making it very sensitive to changes in policy communication. We expect a closer relationship between real yields and the index in the coming weeks, particularly if volatility returns to the rate markets. Traders heavily involved in short-term derivatives will need to guard against sharp price changes, especially after Fed updates. Also, keep in mind that broader actions—like balance sheet changes—are crucial. QT and its opposite, QE, significantly affect dollar liquidity. Currently, the environment leans neutral to slightly restrictive, which may help limit excessive dollar weakness if risk-off trends continue. Every piece of data, from jobs to manufacturing, is more important than ever. As we approach Wednesday, traders will have a short window to reassess the current rate path and the Fed’s guidance. Stay flexible with your positions, avoiding hasty conclusions based on individual data points or movements driven solely by geopolitical events. There is not yet a clear consensus, and misinterpretations could lead to swift reversals, especially in leveraged trades. Create your live VT Markets account and start trading now.

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