The US Dollar Index (DXY) is experiencing mild fluctuations during Wednesday’s trading session, amid a state of cautious anticipation in the markets ahead of the Federal Reserve’s monetary policy decision.
The index is currently trading near the 98.55 level, down by approximately 0.28% in early European hours, after failing to maintain the gains it recorded at the beginning of the week.
In my view, this price action reflects a temporary contraction in dollar momentum, driven by a foggy environment of economic concerns and geopolitical uncertainty, in addition to investors awaiting the Fed’s speech, which will be pivotal in shaping the dollar’s direction over the coming weeks.
The market is not expecting surprises from the Fed in the current meeting, as most forecasts suggest interest rates will remain unchanged.
As a result, the main focus is on the tone of the official statement and the language used by the FOMC. Futures data show there’s now nearly an 80% probability of a rate cut in September, followed by another in October.
These expectations of upcoming monetary easing are putting preemptive pressure on the dollar, explaining part of the index’s current weakness.
From my perspective, unless the Fed’s message contains clear signals of extended tightening or slower-than-expected easing, the dollar is likely to remain under short-term selling pressure.
Another driver behind the dollar’s weakness is the release of weaker-than-expected US economic data. Retail sales in May dropped by 0.9%, worse than the expected 0.7% decline. This indicates a slowdown in consumer spending, a key pillar of the US economy.
Coupled with a 0.2% decline in industrial production—compared to expectations for a slight rise—it becomes evident that the US economy might be entering a cooling phase, possibly marking the peak of monetary tightening. Therefore, I believe that repeated soft data like this enhances the Fed’s readiness to shift toward a more dovish tone, pushing the dollar toward key support zones, particularly the 98.00 level.
Despite this technical and fundamental pressure, there remains a potential source of support for the dollar: the growing demand for safe-haven assets amid escalating geopolitical tensions, especially in the Middle East. The region is witnessing a series of heated exchanges, the latest of which was US President Donald Trump’s call for Iran’s “unconditional surrender.” This signals a clear escalation in rhetoric. While several regional countries are attempting to mediate, the possibility of a wider confrontation remains, which could drive investors to hold on to the dollar as a safe haven. Nevertheless, I believe this factor’s impact will be temporary unless the conflict escalates to direct involvement by the United States.
The DXY continues to trade below its 100-day exponential moving average, reinforcing the bearish outlook in the short term. The Relative Strength Index (RSI) also signals continued downside momentum, leading me to favor further declines toward the 98.00–97.90 area, where some defensive buying could emerge. A break below this level would increase the likelihood of a move toward 97.50 or even 96.80, barring any fundamental shift. On the flip side, any attempt to rebound will likely face strong resistance at the psychological 100.00 level, which has been tested multiple times without a successful breakout by buyers.
If US economic data continues to disappoint and the Fed does not offer strong counter-signals to current rate-cut expectations, the US dollar will likely remain vulnerable to further selling pressure, even amid rising geopolitical tensions. However, I do not expect the decline to be linear or uninterrupted. Short-term technical rebounds may occur, driven by shifting factors such as hedging demand or surprise statements from Fed officials or the White House.
Overall, I believe the US dollar is currently in a delicate transitional phase, where domestic economic impact, geopolitical pressures, and monetary background are all intertwined. The index is moving within a downward channel governed by market expectations of rate cuts and weak economic indicators, partially offset by global tensions. All eyes are now on the Fed’s upcoming statement later today, which could carry surprises that shift the outlook in either direction. Until then, caution and bearish pressure are likely to persist, with a technical focus on the 98.00 level as a pivotal support that may define the dollar’s path in the coming days.
