The US Dollar (USD) has eased in holiday-thinned trading, erasing gains from a stronger-than-expected US Nonfarm Payrolls report. The US Dollar Index (DXY) is flat, hovering near 97.00, after reaching a high of 97.42.

Market participants are weighing strong employment data against risks from US President Trump’s tariffs and fiscal concerns. The House has recently passed a large tax-and-spending bill, which is expected to widen the budget deficit and affect the long-term stability of US finances.

The Tax And Spending Bill

The bill makes 2017 tax cuts permanent, introduces new tax breaks, and raises the debt ceiling by $5 trillion, adding an estimated $3.4 trillion to deficits over ten years. Partisan tension over the bill introduces further market uncertainty.

China and the US have reached a tentative deal to reduce tariffs on certain goods, while India retaliates against US auto tariffs, potentially impacting global supply chains. The robust Nonfarm Payrolls data led to a reduced expectation of a Federal Reserve rate cut in July.

Technically, the US Dollar Index is under bearish pressure, with failed attempts to reclaim the 97.00 mark indicating weak momentum. Potential support and resistance are near 96.30 and 97.20, respectively.

With the recent softening of the US Dollar, following a brief lift from the stronger-than-forecast Nonfarm Payrolls data, many are beginning to reassess short-term directional plays. Though Friday’s job figures shifted expectations around July’s Federal Reserve meeting, the underlying bid in the Dollar quickly faded. Now, as trading volumes ease during the summer slowdown, positioning becomes more about timing than conviction.

Market Response And Strategy

The passing of a new tax-and-spending package in the House throws a new variable into the mix. This legislation, which makes permanent key features of the 2017 tax cuts and introduces fresh tax incentives while simultaneously lifting the debt ceiling by $5 trillion, brings back a theme that markets have seen before: pro-growth in the short term, deterioration in fiscal discipline over the longer horizon. From a risk perspective, any instrument tied to US yields may begin to reflect that, even with a delayed reaction.

Budget deficits projected to widen by $3.4 trillion over the next decade inevitably stretch confidence surrounding Treasury issuance and dollar demand. Default risk isn’t on the table—at least not yet—but spreads might begin to shift subtly, especially across longer-dated rates. In thinner trade, temporary dislocations could appear, offering opportunities for scaled entries or exits, depending on broader trade bias.

On the international stage, developments between Washington and Beijing seem to be moving, albeit in increments, toward easing tensions. Recent signs of compromise on both sides hint at an effort to avoid collapsing further into protectionist patterns. Yet, retaliatory steps from countries like India add another level of complexity to global trade projections. Firms exposed to exports and imports, particularly autos, may find themselves reshuffling hedges if volatility returns to commodity-linked currencies or emerging market FX.

Technically, despite its momentary push higher, the Dollar Index has stalled near prior resistance. That failure to convincingly clear 97.00 suggests underlying momentum is not supportive of further upside. The drop back below that threshold paints a clearer picture. Support around 96.30 becomes essential—not because it implies a turning point, but because breaking through would likely trigger a broader reassessment of trend positioning. Resistance remains defined at 97.20, a level that has repeatedly capped rallies over the past fortnight.

We are monitoring option flows for signs of recalibrated rate hike bets. There appears to be a recalculation taking shape among speculators who had anticipated two rate cuts this year. Now, with the central bank signalling greater data-dependency, interest rate derivatives are reflecting narrower pricing corridors.

As such, short-dated contracts may experience sharper re-pricings in response to even modest data surprises. Given the compressed volatility during the current lull, spreads are likely to widen suddenly if volume picks up. This underscores the need to plot entries more carefully than usual, especially if technicals contradict the broader macro sentiment.

Lingering tensions around the US fiscal base and changing global trade dynamics may foster increased two-way risk in the coming weeks. Directional conviction could remain low until further clarity emerges—particularly from incoming inflation prints or a shift in tone from the Fed. Until then, we continue to approach trades with more flexibility and adopt a posture that’s adaptive, rather than speculative.

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