US Dollar Index fades as markets hold breath ahead of FOMC
- The US Dollar Index slipped again on Tuesday, failing to reclaim the 100.00 level after forming a two-bar reversal pattern at ten-month highs.
- The Federal Reserve is almost certain to hold rates on Wednesday, but the updated dot plot carries significant risk for the greenback's near-term direction.
- Rate cut expectations have been heavily repriced since the Iran conflict began, and markets now price in just one 25bps cut in December 2026.
The US Dollar Index (DXY) eased around 0.2% on Tuesday, slipping back toward the 99.50–99.60 area after a failed attempt to recapture the psychologically significant 100.00 handle. It was the second straight session of softness following last week's surge to ten-month highs near 100.54, a move driven by a combination of safe-haven demand from the US-Israel war on Iran, a sharp repricing of Federal Reserve (Fed) rate cut expectations, and the resulting spike in Oil prices. With the Fed's two-day meeting now underway and the policy statement due at 18:00 GMT on Wednesday, traders are in wait-and-see mode — keeping a lid on fresh directional moves in the greenback.
100.00: The new interim key battleground
The technical picture has shifted subtly but meaningfully over the past two sessions. The DXY tagged a cycle high above 100.50 last week before rolling over in a two-bar reversal formation around the 100 handle, a pattern that typically signals exhaustion of the prevailing trend. Tuesday's inability to reclaim 100.00 reinforces that dynamic.
FOMC: The dot plot is the real trade
The rate decision itself is a non-event; CME FedWatch assigns a 94% probability to an unchanged outcome. What matters is Wednesday's updated Summary of Economic Projections (SEP) and the dot plot, which will be the first since the start of the Iran conflict, Crude Oil at uncomfortable highs, and the knock-on implications for inflation. Prior to the conflict, the median dot had pencilled in one 25bps cut for 2026. There is now a credible risk that the Fed removes even that solitary cut from its projections, effectively sending a zero-cuts signal for the year. That outcome would be unambiguously bullish for the US Dollar — and given current positioning, it could trigger a sharp re-extension toward and through 100.00. Conversely, if Powell's language leans toward patience rather than hawkishness, or the dot plot holds at one cut, the DXY could extend its current pullback toward the 99.00–99.44 support zone. Goldman Sachs has already pushed its next cut call out to September, while fed funds futures are pricing the first reduction no earlier than December.
Rate cut expectations gutted by Iran and Oil
The scale of the repricing in rate expectations since the conflict began has been the dominant driver of dollar strength this month. Before US and Israeli strikes on Iran on February 28, markets were pricing a June cut as the base case, with a reasonable probability of a second move in September. That entire easing trajectory has since been wiped from the curve. The dynamic is straightforward: Oil above $100 per barrel raises near-term inflation expectations, reduces the Fed's room to cut, and pushes real yields higher — all of which support the US Dollar on a rate differential basis. The Reserve Bank of Australia (RBA) underscored this global dynamic overnight, delivering an unexpected rate hike citing energy-driven inflation pressure. It was the first Group of Ten (G10) central bank to move in response to the Oil shock, and it sets a hawkish baseline ahead of this week's Fed and European Central Bank (ECB) decisions.
Dollar softness: Temporary or trend?
The near-term bias for the DXY remains cautiously bullish: Dips have attracted buyers given the geopolitical backdrop, as has the "higher for longer" rate narrative. However, Tuesday's price action is a reminder that the 100.00 level is sticky resistance, not a platform. All eyes now turn to Chair Jerome Powell's press conference at 18:30 GMT on Wednesday, where his framing of the inflation-versus-growth trade-off in the context of the Iran war will set the Dollar's direction for the remainder of the quarter.
US Dollar Index daily chart
Technical Analysis
In the daily chart, the Dollar Index Spot trades at 99.62. The near-term bias is cautiously bullish as price holds above the rising 50-day exponential moving average while remaining capped beneath the gently declining 200-day average, signalling an emerging recovery within a broader range. Momentum firms, with the stochastic oscillator pushing into overbought territory and sustaining elevated readings, highlighting persistent buying pressure rather than a brief spike.
Initial resistance emerges at the recent 100.50 high, where a daily close above would open the way toward the 200-day EMA near 99.45 and then the 101.00 region. On the downside, immediate support aligns with the 50-day EMA around 98.40, with a break exposing secondary support at 97.80 and then the late-month lows near 96.85. As long as price holds above the 50-day average, pullbacks are likely to be treated as corrective within the budding upside phase.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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