The US Dollar Index (DXY), tracking the USD against six major currencies, is stable around the 100.00 mark after rebounding from a two-week low at 99.50. Despite its resilience, the upside is limited due to ongoing fiscal uncertainty in the US.

The approval of President Trump’s tax bill in the House has intensified concerns over increasing US debt, with a projected increase of nearly $3 trillion over the next decade. Moody’s response, by downgrading the US credit rating to Aa1, has affected market sentiment.

Impact of Trade Negotiations

Stalled trade negotiations have also impacted market confidence, resulting in a risk-off atmosphere. However, positive economic data offered some support, with the S&P Global Flash Composite PMI rising to 52.1 in May, indicating growth in business activity.

Technically, the Dollar Index is in a corrective phase beneath the 21-day EMA at 100.40. Momentum indicators show a mixed outlook, with the RSI around 45.79 and the MACD signalling weak bullish sentiment. The 99.50 level serves as critical support, with a risk of further downside if breached.

From a broader perspective, what we’re observing is a balancing act between political developments and underlying economic resilience. The Dollar Index has shown some capacity to recover, yet there’s limited scope for meaningful upside in the near term. Market participants have taken note of the downgrade by Moody’s, and this has weighed on confidence. While the move to Aa1 may not drastically alter positioning on its own, the message it conveys about long-term fiscal responsibility has made traders more cautious in their dollar exposure.

Congressional approval of the tax bill has, paradoxically, done little to spur enthusiasm in the greenback. Although intended to stimulate growth, the projected deficit expansion of $3 trillion over a decade calls into question the sustainability of US fiscal policy. These expectations, now being priced in more dynamically, are beginning to dampen demand for USD, particularly in flows that favour safe, yield-stable instruments.

Sentiment and Economic Performance

Trade discussions, meanwhile, remain in stalemate. The longer the impasse continues, the more investors shy away from assets tied to high policy uncertainty. This has reduced appetite for risk-on trades originating from US dollar strength. The environment has turned more defensive, especially from larger funds, which have begun to rotate out of speculative long positions.

Even so, stronger-than-expected performance in the PMI composite reading—rising to 52.1—suggests a still expanding business sector. That reading, above the 50 level, reflects growth in both manufacturing and services. It has cushioned the downside to some extent, which explains why there’s reluctance to abandon USD entirely. There’s still some trust in the economic engine underneath the political noise.

From a technical viewpoint, ranges are starting to tighten as price hovers below the 21-day exponential moving average. RSI near 45 suggests slight bearish leanings but no strong momentum, while MACD barely holds above its signal line. The support at 99.50 has held twice this month; however, deeper closes below that area could draw in more selling pressure, forcing momentum-based systems to unwind longs.

In the current setup, compression beneath the moving average is often a precursor to volatility expansion. With indicators flashing mixed signals, it appears we are in a wait-and-see mode, though the tilt is downward unless political clarity or better macro numbers re-emerge. For the moment, positioning should consider increased two-way risk. Spike moves around headlines could continue to trigger algorithmic responses, especially in shorter tenor derivative instruments.

A breach of the support level mentioned earlier would likely open up the next leg lower, perhaps even towards 98.80 in extended sessions. It’s worth noting that sentiment remains sensitive to daily news flow, and even modest deviations from expected data can stir intraday moves. For those engaging in leveraged strategies, attention to points of liquidity within the 99.50–100.40 corridor may be the more effective approach, rather than directional bets.

We should be prepared to shift bias quickly, particularly if consensus shifts on economic data trends or debt sustainability. The short-term rhythm is driven not by broad conviction, but by tactical responses to conflicting signals – both technical and fundamental.

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