Insights 
VT 
The US Dollar Index (DXY) remains stable near 98.15 during the early European session. Traders are awaiting the US Federal Reserve’s decision on interest rates this Wednesday amid current Middle East tensions.
Recent US inflation data suggests an 80% chance of a Federal Reserve rate cut in September, followed by another in October. The FOMC Press Conference is expected to provide more insights into this situation.
Consumer Sentiment Improves
Consumer sentiment in the US showed improvement for the first time in six months during June. The University of Michigan’s Index rose to 60.5, surpassing forecasts of 53.5, which could support the Greenback temporarily.
The conflict between Israel and Iran has lasted four days, with further missile launches from both sides. Any increase in geopolitical tensions may enhance safe-haven flows, benefiting the USD.
The USD accounts for over 88% of global foreign exchange turnover and became the global reserve currency post-World War II. Monetary policy by the Federal Reserve significantly influences the value of the dollar.
Federal Reserve tools like quantitative easing (QE) and quantitative tightening (QT) impact credit flow and the dollar’s strength. Economic indicators and geopolitical risks continue to shape the USD’s trajectory.
Impact of Federal Reserve Policy
From the numerical side, the Dollar Index holding near 98.15 isn’t especially surprising, given the weight of event risks currently pressing on both economic and political fronts. While markets aren’t moving dramatically just yet, it’s the lull before a series of releases and policy clarity. That figure—98.15—essentially confirms a waiting game, with few willing to take heavy positioning until more guidance from policymakers emerges.
Considering the inflation prints leaning dovish, many are factoring in two rate cuts, staggered between September and October. The current market pricing indicates that this is no longer a tail-risk scenario but rather the base case. Whether that’s aggressive or appropriate will likely depend less on headline CPI and more on the Fed’s characterisation of broader economic resilience. If Powell reintroduces caution or signals that disinflation isn’t embedded, expectations may shift quickly. We’ll certainly be keeping an eye on the presser for tone rather than specific numbers.
Encouraging consumer sentiment data—especially one that breaks a six-month streak—isn’t a minor point. It tells us that households are, at least temporarily, feeling some confidence return, perhaps from stabilising prices or support in the labour market. The University of Michigan index marching past 60 is well above the expected 53.5 and gives the Fed more flexibility to delay cuts, should they choose that route. However, that could place tension on forward-looking assumptions for rate-sensitive assets.
Concurrently, the developing situation in the Middle East is one of the few drivers that tends to override domestic data. Currency flows are already reflecting increased risk aversion, and that generally keeps the dollar supported, particularly in shorter-dated futures. The risk of escalation—and the duration of current responses from both sides—will almost certainly keep demand elevated for liquid and reliable stores. We’ve seen this pattern many times when conflicts expand without resolution.
When looking at longer-term dollar direction, it always circles back to Fed policy. The USD constitutes over 88% of all FX turnover globally, making it highly sensitive to shifts in policy communication. We anticipate more direct correlation between real yields and the index in the coming weeks, especially if volatility resumes in rates markets. Traders who rely heavily on short-term derivatives will likely need to protect against sharp repricing in either direction, particularly immediately after Fed communications.
It’s also good to remember that broader actions—like balance sheet adjustments—are not just technical footnotes. QT and its inverse, QE, play foundational roles in determining dollar liquidity. Currently, the mix leans toward neutral-to-slightly restrictive, which can be enough to cap excessive dollar softness if risk-off flows continue.
Every data release, from jobs to manufacturing, now matters more than usual. As we approach Wednesday, there’s a compressed window in which traders will need to reassess not only the present rate path but also the Fed’s forward guidance. Keep positions nimble, guarding against premature assumptions based on single data points or movements driven solely by geopolitical headlines. There’s not yet a settled view, and any false read could lead to quick reversals, especially in leveraged setups.
