• The USD lost momentum on Tuesday although it remains above previous resistance levels.
• An improved risk environment and hopes of a dovish turn by the Fed have capped the US Dollar’s recovery.
• DXY: Below 104.55, the next targets are 1.0405 and 1.0365.

The US Dollar (USD) has turned lower during the early European trading session, with market sentiment improving somewhat. Israel has refrained from retaliating against Hizbullah in Lebanon after a deadly attack from the Iran-backed militias this week, which has eased concerns about further destabilization in a highly volatile area.

The US Dollar Index (DXY), however, remains above the previous week’s trading range, with investors wary of taking excessive risks ahead of Wednesday’s Federal Reserve (Fed) interest rate decision. The bank will highly likely leave rates unchanged, but the recent inflation and labor data might prompt Fed Chair Jerome Powell to deliver a more dovish message.

The bank’s latest dot plot suggested only a 25 bps cut in December, but the market is betting on two rate cuts, starting in September, and recent data supports that view. Any hint in that direction would increase negative pressure on the US Dollar.