Dollar forecast: Dollar Index (DXY) rebounds but pressure remains as geopolitics fade

Dollar forecast: Dollar Index (DXY) rebounds but pressure remains as geopolitics fade

• Dollar forecast remains largely negative but lack fresh impetus  
• Geopolitical relief weighs less on the dollar as Iran-Israel tensions ease
• Powell’s testimony hints at dovish tilt, but not enough to shake USD stability

After a couple of weeks of heightened geopolitical tension, markets were quick to sigh relief. In no time, US and global markets have rallied, lifting Nasdaq 100 futures to a new record high today. The US dollar has eased back a tad after selling off initially on the back of the ceasefire between Iran and Israel, which appears to be holding. And with that, the premium on oil has completely evaporated, removing one of the sources of support for the dollar. Unsurprisingly, the US dollar drifted lower earlier this week, testing recent year-to-date lows against the likes of the euro, pound and franc, as risk sentiment improved, before staging a mild rebound thus far in today’s session. But now that the dust is settling in the Middle East, the market’s gaze is shifting firmly back to US-specific factors. Powell will be testifying again today, we have the fed’s favourite inflation gauge on Friday and then the focus will turn back to trade and tariffs, with the July 9 deadline approaching. All told, the US dollar forecast remains largely negative.

What catalysts could impact the dollar forecast from here?

The dollar’s recent weakness makes sense if you view it as the tail end of a geopolitical unwind. But from here, further declines likely depend on macroeconomic – not geopolitical – catalysts. Whether it’s economic data, a shift in Fed’s tone, or political developments like Trump’s fiscal stance or tariff plans, the next leg for the dollar will most likely be driven at home than abroad.

Today brings part two of Powell’s testimony and some housing data. Not market-moving in isolation, but worth watching, nonetheless. Overall, the risks for the dollar remain tilted to the downside, but the path lower could be slow and conditional.

So, a truly bearish scenario – a Fed that suddenly turns dovish under political duress – hasn’t materialised. For that reason, I am only expecting modest further weakness for the dollar – and that too on the back of major surprises in data. Without it, the greenback may be able to consolidate and perform mixed against different currencies.

Powell will remain in focus after hints of earlier rate cuts

Yesterday, Jerome Powell’s Congressional testimony offered little drama but subtle signals. While the Federal Reserve Chair reiterated the Fed’s cautious stance on rate cuts — and tactfully sidestepped political pressure from Trump’s camp — markets latched onto his slightly more open tone towards discussing future rate cuts. But it wasn’t a game-changer for the dollar, only a green light for a mild dovish repricing. It’s a stretch to say Powell delivered a USD-negative bombshell.  After all, the weakness in the dollar had a lot to do with the collapse in oil prices and unwinding of bearish bets against currencies that were deemed to suffer as a result of tensions in the middle east – including the euro. The single currency went on to hit a new 2025 against the greenback before easing back lower today along with everything else.

Dollar forecast: Dollar Index (DXY) technical analysis

Source: TradingView.com

The trend on the US dollar index (DXY) is bearish, no questions there. But that alone doesn’t mean we will see further declines. Still, the bears will feel confident to step in on the back of short-term rallies while the macro picture doesn’t change materially to favour the greenback. With that in mind, watch for potential resistance to emerge around 98.65 – should we get there. This level was prior support and is where the bearish trend line and 21-day exponential average converge. Above this area, the bears will start to feel the pressure of a squeeze. The next major resistance above that area is seen in the area around 100.00, marking the lows from July 2023 (99.57) and September 2024 (100.15).

On the downside, support in the range between 97.60 to 67.92 (shaded in grey) has held firm for now. It won’t take much effort to break below here, given an overall bearish trend and dollar forecast. Perhaps a weaker core PCE index on Friday could be the catalyst for a breakdown. Below that range, round handles like 97.00 and 96.00 will then come into focus.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R