The US Dollar Index (DXY) is trading slightly higher at around 101.00, measuring the Dollar against six other currencies. This comes after mixed economic reports from the US and a drop in consumer sentiment, which fell to 50.8 in May from 52.2 in April, marking its lowest point since June 2022. Predictions for inflation are rising, with one-year expectations at 7.3% and five-year expectations at 4.6%. Recent US data showed an unexpected drop in April’s Producer Price Index and a small increase of 0.1% in Retail Sales. President Trump’s announcement of new tariffs raises concerns about trade. Market forecasts suggest a 51.1% chance of a rate cut by September, with further cuts anticipated through 2026. The DXY is holding steady in the range of 100.52 to 101.14.

Indicators of Market Momentum

Indicators such as the Relative Strength Index and Moving Average Convergence Divergence show neutral momentum with a slight positive tone. The Dollar is the most traded currency globally, accounting for over 88% of all foreign exchange transactions. The Federal Reserve’s monetary policy, including interest rate changes, greatly affects its value. Practices like quantitative easing and tightening are significant strategies used by the Federal Reserve. The dollar index has modest gains despite mixed data from Europe. It remains above the key 101.00 level but is trading within a narrow range for now. Consumer sentiment in May drops to levels not seen since mid-2022, indicating falling consumer confidence. This is not a good sign for economic growth, especially as spending shows signs of weakness. The slight 0.1% increase in retail sales in April suggests no revival is on the horizon. Combined with soft producer inflation, this signals stagnation rather than overheating. At the same time, expectations for inflation—both short and medium-term—are rising. The one-year inflation expectation increased to 7.3%, and the five-year to 4.6%. While this may not raise immediate concerns for the central bank, it contradicts the disinflation narrative the markets anticipated. This uncertainty is reflected in futures markets, where participants are divided on the timing of rate cuts, with just over half expecting the first cut by September. This situation is not reassuring for momentum-based strategies, with expectations now extending to 2026 as a more extensive easing cycle is anticipated.

Trade Policy Risks

There is also a risk from trade policy. Renewed talk of tariffs raises concerns about price stability and supply chains. Such policies can impact the consumer price index over time, complicating large capital flows. From an indicator perspective, medium-term technicals show pricing caution. RSI readings are close to neutral, and MACD has lost much of its strength. This suggests a lack of clear direction, which might not be helpful for making bets based on trends. However, the slight upward trend indicates the market is not ready to abandon the dollar just yet; it seems to be observing rather than acting. Currency risk is heavily influenced by forward guidance and rate expectations, especially in derivatives. Daily price swings tend to react more than predict, suggesting that patience may be more effective than impulsive decisions. Current information suggests a waiting game. Watching the evolving odds of policy announcements—both expected and unexpected—might be more advantageous than jumping into price movements too soon. Any strong directional commitment will likely need to align with confirmed economic reports, particularly in inflation and consumer spending. The Fed has significant influence and navigates a narrow path based on data and market reactions. Its tools for managing rates and liquidity limit the potential for surprises. This could result in sharper moves in the dollar once any directional shifts are confirmed, as current consolidation limits expectations. We will keep an eye on spreads and cross-currency flows, focusing on widening policy differences. When other central banks change rates faster or slower, the dollar’s strength could be challenged. For now, it’s essential to align strategies with the facts, not assumptions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now