The Dollar Index weakens as Federal Reserve speakers hint at a dovish stance amid rising Middle East tensions. Fed speaker Michelle Bowman suggests a potential rate cut in July, with Federal Reserve Chair Jerome Powell’s testimony looming.

US President Donald Trump confirmed strikes on Iranian sites, stirring concerns of possible Iranian retaliation. Anxiety surrounds the potential disruption of oil traffic through the Strait of Hormuz due to escalating tensions.

Economic Indicators And Market Reactions

The Dollar Index initially surged past the resistance level of 99 but later declined. S&P Global’s June PMI data showed manufacturing steady at 52 while services dipped to 53.1, both indicating economic resilience.

Fed Governor Bowman advocates for an open consideration of a rate cut, echoing earlier remarks from Governor Waller. Powell’s Tuesday testimony will be closely watched for insights on the central bank’s December policy trajectory amid disinflation concerns.

The US Dollar Index met resistance at the 50-day SMA but rebounded from 98.00 support levels. A close above this MA might lead to 100.57, reflecting 23.6% Fibonacci retracement. The RSI suggests slight downward momentum.

The Federal Reserve’s monetary policy, adjusting interest rates, influences USD strength. Quantitative Easing and Quantitative Tightening impact the Dollar, with the Fed’s next move highly anticipated.

Monetary Policy Insights

Looking at recent remarks from Bowman, there’s now a growing sense that July might be a turning point for monetary policy. While no decisions have been finalised, such comments often act as a soft signal to the market. The suggestion of flexibility on rates, combined with Waller’s earlier statements, indicates that internal consensus might be forming around adjusting borrowing costs.

From where we stand, that leaves little ambiguity; if inflationary pressures continue easing, and employment figures remain firm but not overheating, the central bank could lean into a rate cut without facing credibility issues.

Powell’s upcoming appearance before policymakers gains much more weight in this context. With inflation not surging and some cooling showing up in services PMI data, Powell may opt to reinforce the message of patience with tightening. The June services reading dipping to 53.1 doesn’t ring alarm bells, but paired with a steady 52 in manufacturing, it paints a picture of moderated expansion — enough to avoid immediate concern, but not so strong as to keep rates elevated indefinitely.

In parallel, the Middle East risks can’t be ignored. Trump’s confirmation of military action injects a very real possibility that Iranian forces might retaliate through asymmetric means — most commonly by threatening oil flows. The Strait of Hormuz, depending on how events unfold, could experience restricted shipments or, even worse, maritime incidents. We’ve seen before how such blockages ripple through energy prices and spill into FX volatility.

The initial strength in the Dollar Index above 99 was short-lived. It failed to maintain momentum past the 50-day Simple Moving Average — a level that often works as a real-time test for sentiment. Although the DXY bounced from the 98.00 zone, we’d interpret a move above 100.57 as a technical break rather than momentum shift. The 23.6% Fibonacci retracement serves more as a checkpoint than a destination.

RSI trends point to slight exhaustion in current buying. That doesn’t mean a collapse is near, but it warns against overextending bullish positions. If Powell’s testimony dampens hawkish expectations, or if oil prices spike due to geopolitical risks, that could reinforce existing hesitations.

At a broader level, the Fed’s posture on liquidity — through easing or tightening — remains the primary steering mechanism for the dollar against peers. When holding long or synthetic directional positions, adjusting exposure ahead of Powell’s remarks is almost obligatory. Leaning too heavily on trend continuation before the testimony risks misalignment with the Fed’s tone.

We’ve seen markets misjudge dovish pivots before. Our current stance would be to move cautiously, reducing high-leverage plays on USD pairs until clearer signals emerge. Watching volume along resistance zones and positioning ahead of rate instruments might offer better insight than reacting post hoc to headlines.

In this environment, patience and responsiveness to incoming data seem wiser than anticipation.

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