US Dollar ticks down as market sentiment improves ahead of the Fed

• The USD lost momentum on Tuesday although it remains above previous resistance levels.
• An improved risk environment and hopes of a dovish turn by the Fed have capped the US Dollar’s recovery.
• DXY: Below 104.55, the next targets are 1.0405 and 1.0365.

The US Dollar (USD) has turned lower during the early European trading session, with market sentiment improving somewhat. Israel has refrained from retaliating against Hizbullah in Lebanon after a deadly attack from the Iran-backed militias this week, which has eased concerns about further destabilization in a highly volatile area.

The US Dollar Index (DXY), however, remains above the previous week’s trading range, with investors wary of taking excessive risks ahead of Wednesday’s Federal Reserve (Fed) interest rate decision. The bank will highly likely leave rates unchanged, but the recent inflation and labor data might prompt Fed Chair Jerome Powell to deliver a more dovish message.

The bank’s latest dot plot suggested only a 25 bps cut in December, but the market is betting on two rate cuts, starting in September, and recent data supports that view. Any hint in that direction would increase negative pressure on the US Dollar. 

Before that, the JOLTS Job Openings for June and the Conference Board’s Consumer Sentiment Index for July, due on Tuesday, are expected to show moderate contractions, which will provide the right framework for a dovish message from the central bank.

Daily digest market movers: US Dollar loses steam amid a slightly brighter market mood

• Risk appetite has returned on Tuesday, favoured by easing concerns about an escalation of the Middle East conflict. This is pushing risk assets higher and weighing on the safe-haven USD.
   
• Israeli authorities have affirmed that they are willing to avoid an all-out war in the Middle East. This has calmed markets, which are wary that the reaction would attract a direct involvement of Iran in the conflict.
   
• In the economic calendar on Tuesday, the US JOLTS Job Openings are expected to have dropped slightly, to 8.03 million in June from 8.14 million in May.
   
• Also today the Conference Board’s Consumer Sentiment Index is seen contracting to 99.5 in July from the 100.4 posted in the previous month.
   
• The main focus, however, is the Fed’s monetary policy meeting. Data from the CME Group Fed Watch Tool shows that markets are pricing only a 4.1% chance of an interest rate cut on Wednesday, while a 25 bps rate cut is fully priced for September.
   
• Data released last week showed that the US Personal Consumption Expenditures (PCE) Prices Index ticked down in June, although the core PCE remained at 2.6% year-over-year. This reading is close to the bank’s 2% inflation target and maintains hopes of a September rate cut alive.

DXY Technical Outlook: Testing 1.0450 after failure at 104.80 area

The US Dollar Index (DXY) recovery has lost momentum on Tuesday, with risk assets bouncing up amid a more favorable environment. Bulls have been capped at 104.80 and they are now testing previous resistance, turned support, at 104.55.

A further pullback below that level would put 104.05 back into play ahead of 103.65. On the upside, resistances are the mentioned 104.80 and 105.22.