US Dollar faces choppy trade as policy outlook and tariffs fuel caution

Source Fxstreet
  • The US Dollar Index fluctuates around the mid-104s in Tuesday’s session, easing from earlier strength.
  • Optimism around reduced tariffs fades as mixed Fed comments muddy interest rate expectations.
  • Momentum improves, but key moving averages still flash warning signs near major resistance zones.

The US Dollar Index (DXY) is experiencing mixed performance on Tuesday, trading around the middle of the 104.00 zone. Earlier in the day, the Greenback found support on stronger services activity and signs that proposed tariffs may be more targeted than feared.

However, uncertainty returned as new headlines from US policymakers tempered the optimism. The evolving rhetoric on inflation and trade created a back-and-forth movement in the DXY, now grappling with nearby resistance. From a technical standpoint, the Moving Average Convergence Divergence (MACD) prints a mild buy signal, while the Relative Strength Index (RSI) is neutral. Despite improving momentum, key Simple Moving Averages (SMAs) suggest the broader setup still leans bearish.

Daily digest market movers: Sentiment weighs on US Dollar after earlier tariff optimism

  • The DXY trades in a tight range around the mid-104s, struggling to sustain upside after testing higher early Tuesday.
  • President Trump hinted at exemptions for certain countries from April tariffs, raising hopes of limited global trade fallout.
  • Trump also reaffirmed upcoming tariffs on aluminum, autos and pharmaceuticals, keeping markets alert for trade-related volatility.
  • Fed Governor Adriana Kugler flagged fresh inflation pressures, noting worrying trends in select goods categories.
  • The New York Fed’s John Williams said both firms and households are navigating deep uncertainty about economic prospects.
  • Despite neutral tones from both Fed officials, traders see inflation fears potentially slowing the pace of rate cuts. This Friday’s Core PCE data remains the key event with markets closely watching the Fed’s preferred inflation indicator.

Technical analysis: DXY hesitates below key barriers despite improving momentum

The US Dollar Index trades with caution near the 104.00 handle, reflecting a balance between softening sentiment and residual optimism from Monday’s gains. The MACD currently prints a mild buy signal at -0.774, supported by a positive 10-day momentum reading. Meanwhile, the Relative Strength Index (RSI) sits at a neutral 40.20, suggesting the pair is not oversold but lacking strong bullish conviction. The combined RSI/Stochastic indicator also reflects hesitation, reading just above 96.

Despite these hints of recovery, the broader outlook remains under pressure. The 20-day, 100-day and 200-day Simple Moving Averages (SMAs) — at 104.53, 106.74, and 104.93 respectively — continue to trend lower. The 30-day Exponential Moving Averages (EMAs) and SMAs (both above 105.00) reinforce a heavy overhead zone.

On the downside, support is seen at 104.02 and 103.76, while resistance lies around 104.30, 104.53 and 104.54. The index may need a strong macro catalyst to break free from this congested range.

 

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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