The US Dollar (DXY) has reversed its earlier losses and resumed its upward trend during Tuesday’s European trading session. This recovery comes amidst easing risk aversion following Israeli authorities’ statements aiming to avoid a full-scale conflict in the Middle East. However, market participants remain cautious ahead of the Federal Reserve’s (Fed) interest rate decision on Wednesday.

Market Expectations:

While the Fed is expected to leave interest rates unchanged, recent inflation and labor market data suggest the possibility of a dovish message from Fed Chair Jerome Powell. The market is already pricing in two rate cuts this year, starting in September, and any hints in this direction from the Fed could further weaken the US Dollar.

Economic Data:

Today’s release of the US JOLTS Job Openings and the Conference Board’s Consumer Sentiment Index is expected to reveal moderate contractions, supporting the case for a dovish Fed stance. However, the primary focus remains on the Fed’s policy meeting and any potential signals regarding future rate cuts.

Technical Analysis:

The DXY index has rebounded strongly from the 104.55 resistance level, forming a bullish engulfing candle on the 4-hour chart. This suggests a potential upward continuation, with the next target at 104.80, followed by 105.20. On the downside, 104.55 now acts as a support level, with further support at 104.05 and 103.65.