US Dollar Index Tests an Important Support Level

The USDX has failed to get back above the 100 level when there was some Middle East conflict. Now there is the chance that further weakness can come.  

Weakness below the 97.82 level could start a rally in global currencies against the dollar. Adding further pressure to the dollar has been dovish comments from the Federal Reserve. 

The recent dovish comments by Fed officials have heightened hopes of a rate cut in July or, most likely, in September, and have increased pressure on the USD. 

Fed Vice Chair Michelle Bowman and voting member Christopher Waller have both called for a rate cut in July. The inflationary impact of tariffs is likely to be more than markets expect, which would allow the bank to support a weaker labour market. 

In a Tuesday testimony to Congress, Fed Chair Jerome Powell said rate cuts “can wait,” despite recent pressure from the President to cut by a large amount. 

“Increases in tariffs this year are likely to push up prices and weigh on economic activity,” Powell said. 

“The effects on inflation could be short-lived — reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent”. 

The Fed is “well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he added. 

A failure to cut rates soon will keep the pressure on Powell, but the dollar is not showing signs of a stubborn Fed. The market appears to be pricing in lower rates over the medium-term.