The US Dollar traded cautiously on Friday as demand for safe-haven assets eased following renewed optimism surrounding a potential agreement between the United States and Iran.
At the time of writing, the US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, was largely unchanged near the 99.00 level.
The index retreated from its more than seven-week high of 99.10 reached on Thursday after reports suggested that the United States and Iran had reached a 60-day Memorandum of Understanding (MoU).
According to the reports, the proposed agreement still requires approval from US President Donald Trump.
Improved geopolitical sentiment pressures the dollar
The Dollar Index faced pressure as hopes of a US-Iran agreement weighed on oil prices.
The decline in energy prices reduced one of the key factors that had recently supported the US currency.
The US Dollar has outperformed since the start of the Middle East conflict.
Higher oil prices fuelled concerns about inflation in the United States and prompted traders to reassess expectations for Federal Reserve policy.
Elevated energy costs had contributed to a shift in market expectations, with traders reducing bets on interest rate cuts.
As a result, the Dollar benefited from expectations that interest rates could remain higher for longer.
However, renewed optimism over a potential diplomatic breakthrough between the US and Iran has softened those expectations and reduced support for the Greenback.
Markets reassess Federal Reserve outlook
According to the CME FedWatch tool, markets currently see a 52.9% probability that the Federal Reserve will keep interest rates unchanged through the end of the year.
The remaining market participants favour at least one interest rate increase.
This marks a significant shift in expectations compared with the period before the Middle East conflict began.
Before the war, traders had anticipated two interest rate cuts before year-end.
The change in expectations highlights how geopolitical developments and energy prices continue to influence views on inflation and monetary policy.
Focus shifts to next week’s economic data
Investors are now looking ahead to a series of key US economic releases scheduled for next week.
Market participants will closely monitor the Institute for Supply Management’s Manufacturing and Services Purchasing Managers’ Index (PMI) reports, as well as the Nonfarm Payrolls (NFP) report for May.
The data could provide further clues about the strength of the US economy and help shape expectations for future Federal Reserve policy decisions.
Dollar Index remains range-bound
From a technical perspective, the Dollar Index continued to trade within a narrow range near 99.00.
The index has remained confined between 98.84 and 99.54 over the past two weeks, indicating a period of consolidation following recent gains.
Despite the sideways movement, the near-term outlook remains mildly positive.
The index continues to hold above its 20-day Exponential Moving Average (EMA), which currently stands at 98.91.
It is also trading comfortably above the former uptrend-line break area around 98.15.
Momentum indicators suggest a modestly constructive tone.
The Relative Strength Index (RSI) is at 52.71, slightly above the neutral 50 level.
This points to mild bullish momentum but does not indicate a strong directional trend.
On the downside, immediate support is located at the 20-day EMA near 98.91.
Additional support can be found around the broken trend-line area near 98.15.
As long as the index remains above these levels, declines are likely to be viewed as corrective within the broader recovery structure.
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