US Dollar (DXY) Slides to 98: Middle East Ceasefire and Fed Dovish Signals Trigger Risk-On Rally
The US Dollar Index (DXY) fell even further on Tuesday, dropping to about 98.06 at the time of writing. This was because President Donald
Quick overview
- The US Dollar Index (DXY) fell to about 98.06 due to a truce announcement between Israel and Iran, prompting a risk-on rally in global markets.
- Federal Reserve officials signaled a potential rate cut in July, increasing market expectations for monetary easing and contributing to the dollar's decline.
- Technical analysis shows a bearish reversal pattern for the DXY, indicating potential further declines with key support levels at 97.74 and 94.66.
- The dollar's performance is closely tied to crude oil prices, which have weakened its status as a safe haven currency amid falling oil prices.
The US Dollar Index (DXY) fell even further on Tuesday, dropping to about 98.06 at the time of writing. This was because President Donald Trump announced a full truce between Israel and Iran, which caused a big risk-on rally in markets around the world. During the 12-day conflict, the dollar gained value because it was a safe haven. But when investors started to buy riskier assets, the dollar fell.
After what he called “The 12-Day War,” Trump said that the ceasefire was “now in effect.” However, the Israeli military said that missiles were still being launched from Iran hours after the statement. Even though the news was mixed, markets mostly liked it. Risk-sensitive currencies like the Australian dollar and the New Zealand dollar both rose by 0.5% and 0.55%, respectively. The Israeli shekel rose 1% versus the dollar, making it the strongest it has been since February 2023.
Fed Officials Signal July Rate Cut Possibility
The dollar’s problems got worse as Federal Reserve officials maintained their dovish shift, with Governor Michelle Bowman joining Christopher Waller in saying that a possible July rate drop would be good. Bowman said that the central bank should think about lowering interest rates soon, especially if inflation stays low and the labor situation gets riskier. This dovish change has made traders more likely to bet on monetary easing. Markets are now pricing in about 55 basis points of rate cuts by the end of the year, which is a big jump from what they thought before.
CME FedWatch data shows that the chance of a rate cut in July has gone up from 14.5% to about 23%. This is a big change in the Fed’s mood, as several policymakers are now openly talking about the likelihood of early monetary accommodation.
DXY Technical Analysis Reveals Bearish Reversal Pattern
From a technical point of view, the DXY’s price movement is bad news for dollar bulls. After being completely rejected at the 99.40 resistance level, the index produced a significant bearish reversal candle on Monday. This was the sixth time in a row that it failed to test the 50-day moving average. This pattern of rejection shows that there is substantial resistance above and the possibility of more decline.
The momentum indicators are lining up in a bearish way. The RSI(14) has broken its upward trend but is still below the neutral 50 mark. Also, the MACD is curving back toward the signal line below zero, which means that bullish momentum is getting weaker. These technical aspects make it more likely that support will be tested again at 97.74.
Oil Price Correlation Drives Dollar Sentiment
The dollar’s recent performance has been greatly affected by how closely it follows crude oil prices. The rolling 12-hour connection between DXY and front-month WTI crude futures has gotten a lot stronger. This is because oil prices have gone down, which has hurt the dollar. The US dollar’s standing as a safe haven currency related to America’s status as an energy giant has eroded as oil prices fall after the ceasefire announcement.
US Dollar DXY: Key Levels to Watch
Because of a mix of fundamental and technical considerations, the DXY looks like it will go down more in the near future. The immediate support level at 97.74 is a very important test. If the price breaks below this level, it could fall more quickly below the 94.66 area, where the next major technical support level sits.
The 50-day moving average is the second most important level of resistance, while 99.40 is the most important level of resistance. For the dollar to get back on the rise, it would need to break through these levels decisively and keep going up.
DXY’s Outlook Hinges on Powell Testimony and PCE Data
The dollar’s short-term direction will mostly depend on Fed Chair Jerome Powell’s semi-annual testimony to Congress on Tuesday and Wednesday, as well as Friday’s core PCE inflation data, which is the Fed’s preferred measure of inflation. If Powell or other Fed officials say anything dovish, it might speed up the dollar’s slide, especially if core PCE shows that it is still moderating.
Because crude oil prices are going down, Fed officials are hinting at possible rate cuts, and technical indications are trending bearish, it looks like the DXY will continue to lose value. But if tensions rise again in the Middle East or Fed officials take a hard line, the current pessimistic mood might change rapidly, and the dollar could stay above the important 98.00 mark.
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