The US dollar is currently influenced by two conflicting forces, each pushing it in different directions. On the positive side, the expectation of Trump's re-election may lead to increased fiscal stimulus and the imposition of new tariffs on US imports, which could potentially push up US inflation and thus increase interest rates and yields. On the contrary, from a negative perspective, market expectations for the Federal Reserve to cut interest rates have been on the rise due to recent weaker than expected US inflation and economic activity data. At present, the latter force seems to dominate, reflecting its direct impact, and it is expected that the Federal Reserve will cut interest rates for the first time in the coming months.

The expectation of the Federal Reserve cutting interest rates is becoming increasingly prominent, and it is expected to cut interest rates for the first time soon, which has led to the recent defensive stance of the US dollar. But many negative factors related to the Federal Reserve have already been reflected in the price of the US dollar, as indicated by the high probability (about 80%) that investors believe there will be three interest rate cuts this year. This outlook seems too pessimistic, and the upcoming release of US economic data and communication with the Federal Reserve may challenge this view.

In the foreign exchange market, the US dollar has already digested many negative factors, as evidenced by investors reducing their long positions in the US dollar. This indicates that only significant deviations from expected data will have a lasting impact on the US dollar. The current popularity indicates that, given the adjusted market position, the US dollar may be more resilient to negative data than previously thought.

In short, influenced by potential fiscal policies and the upcoming interest rate cuts by the Federal Reserve, the US dollar is at a crossroads. Although the expectation of interest rate cuts currently dominates, the market may have already digested most of the negative outlook. Therefore, the upcoming economic data and communication with the Federal Reserve will be the key to determining the future trend of the US dollar.

Daily chart of the US dollar index