The US Dollar Index (DXY) traded in a narrow range on Friday, holding near the 99.00 mark as renewed optimism over a potential diplomatic breakthrough between the United States and Iran dampened safe-haven demand. The index retreated from Thursday's seven-week high of 99.10 after reports emerged of a 60-day Memorandum of Understanding (MoU) between the two nations, though the agreement still requires approval from President Donald Trump.
Geopolitical Sentiment Shifts Weigh on the Dollar
The prospect of easing Middle East tensions has pressured oil prices, removing a key pillar of support for the US currency. Since the onset of the regional conflict, the dollar had strengthened as higher energy costs fueled inflation concerns and prompted traders to reassess Federal Reserve policy expectations. Elevated oil prices had led markets to reduce bets on interest rate cuts, boosting the greenback on expectations that rates would remain higher for longer. However, the recent diplomatic signals have softened those expectations, reducing the dollar's appeal.
For context, the dollar's recent performance has been closely tied to geopolitical developments. As noted in our earlier coverage of Dollar Steady, Markets Cautious Ahead of US Jobs Report; Gold, Oil Range-Bound, the currency has been range-bound amid conflicting signals from the Middle East and US economic data.
Market Reassesses Fed Rate Path
According to the CME FedWatch Tool, markets now assign a 52.9% probability that the Federal Reserve will keep interest rates unchanged through year-end, with the remainder favoring at least one rate hike. This marks a significant shift from before the Middle East conflict, when traders had anticipated two rate cuts by the end of the year. The evolving outlook underscores how geopolitical events and energy prices continue to influence inflation expectations and monetary policy views.
Economic Data in Focus
Investors are now turning their attention to next week's slate of US economic releases, including the Institute for Supply Management's Manufacturing and Services Purchasing Managers' Index (PMI) reports and the Nonfarm Payrolls (NFP) report for May. These data points will provide fresh clues on the strength of the economy and could shape expectations for future Fed decisions. A stronger-than-expected jobs report, for instance, could reinforce the case for higher-for-longer rates, while weak data might revive rate-cut bets.
Recent data, such as the strong services PMI and private payrolls figures that pushed the dollar index to 99.50, as highlighted in US Dollar Index Hits 99.50 on Strong Services PMI and Private Payrolls Data, have kept the dollar supported. However, the current consolidation suggests markets are awaiting further catalysts.
Technical Analysis: Dollar Index Range-Bound
From a technical perspective, the Dollar Index has been consolidating between 98.84 and 99.54 over the past two weeks, reflecting a period of indecision after recent gains. Despite the sideways movement, the near-term outlook remains mildly positive. The index continues to trade above its 20-day Exponential Moving Average (EMA) at 98.91 and well above the former uptrend-line break area around 98.15.
Momentum indicators point to a modestly constructive tone. The Relative Strength Index (RSI) stands at 52.71, slightly above the neutral 50 level, indicating mild bullish momentum without a strong directional bias. On the downside, immediate support is at the 20-day EMA near 98.91, with additional support around the broken trend-line area near 98.15. As long as the index holds above these levels, any declines are likely to be viewed as corrective within the broader recovery structure.
Meanwhile, the easing of geopolitical tensions has also impacted other markets. For instance, gold has seen a modest uptick as dollar weakness and lower oil prices fuel demand, as reported in Gold Rises 0.7% to $4,461 as Dollar Weakness, Lower Oil Prices Fuel Demand. The interplay between the dollar, oil, and safe-haven assets remains a key theme for investors.
This article is for informational purposes only and does not constitute financial advice.
