Overview: Dollar Loses Momentum After Strong Run

The U.S. dollar slipped slightly against major peers this week as markets digested a fresh wave of trade protectionism rhetoric and looked ahead to critical U.S. inflation data. While the greenback remains near its recent highs, the rally appears to be stalling amid growing concern that U.S. trade policies could weigh on global demand and prompt central bank caution.

The Dollar Index (DXY), which tracks the USD against a basket of six major currencies, hovered around the 105.20 level, down from its monthly peak. Safe-haven flows into the dollar have moderated, and traders are reassessing positioning as macro uncertainty clouds near-term outlooks.

Trade Protectionism Revives Market Volatility

Much of the recent hesitation in the dollar’s strength stems from the return of protectionist rhetoric in U.S. political discourse. Former President Donald Trump unveiled a new round of proposed tariffs targeting imports from Canada, South America, and parts of Asia, aimed at “restoring fair competition.”

The threat of a renewed global trade war has triggered caution across equity and currency markets. Although the dollar initially benefited from risk-off flows, the medium-term impact could be less favorable. A prolonged disruption in global trade could suppress growth, reduce capital flows, and complicate the Federal Reserve’s monetary policy path.

Emerging market currencies and commodity-linked pairs have shown notable weakness, while major counterparts like the euro and pound are stabilizing as investors seek policy clarity.

EUR/USD and GBP/USD Recover Slightly

The euro (EUR) and British pound (GBP) gained modestly against the dollar as traders priced in a potential pause in U.S. dollar strength. EUR/USD climbed back toward the 1.1700 level, supported by mildly hawkish comments from European Central Bank officials and improving German industrial sentiment.

GBP/USD also rebounded above 1.3475, helped by stronger-than-expected UK labor data and signs that inflation pressures may be easing. While both currencies remain range-bound, technical and fundamental support is growing for a sustained near-term recovery—particularly if U.S. inflation surprises to the downside.

The divergence between Federal Reserve and Bank of England rate expectations has narrowed, reducing the dollar’s yield advantage and giving other majors a window to regain ground.

Commodity Currencies Struggle to Find Support

Commodity-linked currencies like the Australian dollar (AUD), New Zealand dollar (NZD), and Canadian dollar (CAD) remain under pressure due to a combination of falling commodity prices and deteriorating global trade expectations.

The Canadian dollar has been hit particularly hard following the announcement of 35% U.S. tariffs on Canadian goods, with USD/CAD surging above 1.3850. Meanwhile, AUD/USD is battling to hold above 0.6600 as iron ore demand from China softens and domestic wage growth disappoints.

As global commodity prices retreat and central banks in resource-heavy economies turn more dovish, the outlook for these currencies remains fragile unless global growth data improves.

Fed Policy and Inflation Expectations in Focus

The Federal Reserve’s stance continues to drive medium-term dollar outlooks. With June’s labor market data showing modest cooling and consumer sentiment indicators turning slightly lower, traders are increasingly focused on whether upcoming inflation data will validate the Fed’s current rate path.

Consensus forecasts for the upcoming Consumer Price Index (CPI) report suggest inflation may hold steady around 3.3%, with core CPI still above 3%. A hotter print could reignite dollar strength as rate cut hopes fade, while a weaker reading could open the door to dovish recalibration.

Fed Chair Jerome Powell has reiterated a data-dependent approach, but recent Treasury yield moves and softening economic indicators may pressure the central bank to adopt a more cautious tone in coming months.

Technical Analysis: DXY and Key FX Pairs

The U.S. Dollar Index (DXY) remains in a broad 104.70–105.80 range, with resistance at 106.20 and support at 104.30. RSI levels suggest consolidation, while moving averages indicate a slowing uptrend.

EUR/USD is attempting to form a bullish reversal above 1.1700. If sustained, next targets include 1.1750 and 1.1820. Support lies at 1.1625 and 1.1580.

GBP/USD is testing resistance at 1.3510, with momentum favoring further upside if it clears the level cleanly. Near-term support is seen at 1.3420 and 1.3350.

Commodity pairs like AUD/USD and USD/CAD remain more volatile, with the latter showing breakout potential toward 1.4000 if U.S.–Canada tensions escalate.

Investor Positioning and Risk Sentiment

Institutional flows suggest a shift toward more defensive positioning. Hedge funds and asset managers have reduced long-dollar exposure while increasing allocations to the Japanese yen (JPY) and Swiss franc (CHF), reflecting rising geopolitical hedging.

Options markets show increased demand for downside protection in DXY and upside exposure in EUR/USD and GBP/USD. This reflects a consensus that the dollar rally may be overextended and vulnerable to mean reversion if macro conditions shift.

Retail traders, by contrast, remain net long on USD across multiple pairs, suggesting that any major downside surprise could trigger a crowded-exit scenario and fuel accelerated selling.

Conclusion

The U.S. dollar’s recent pause reflects a complex interplay of global trade risks, shifting inflation expectations, and recalibrated rate path probabilities. While underlying support remains due to the Fed’s cautious stance and safe-haven appeal, rising volatility and external pressures could cap further gains in the near term.

Much will depend on incoming U.S. inflation data, central bank rhetoric, and whether trade tensions evolve into a full-fledged standoff. Until then, the dollar is likely to trade in a wide range, reacting quickly to geopolitical headlines and economic surprises.

For traders, this environment favors short-term strategies, disciplined risk management, and close attention to macro catalysts that could shift sentiment in either direction.