After a sluggish start to the year, we see that the U.S. dollar has entered Q2 at a critical juncture. The Federal Reserve has maintained a cautious stance, holding rates steady for the second straight meeting, even as economic growth slows and inflation expectations drift higher. Meanwhile, global investors are repositioning amid diverging central bank paths, renewed trade uncertainty, and a market that’s trying to price in what comes next — not just what’s been.

In this environment, the dollar is no longer reacting solely to economic data — it’s caught in the crosscurrents of policy patience, political headlines, and shifting global flows. As the Fed dials back its tightening bias and the rest of the world begins to ease, the USD’s role as a defensive anchor is being tested.

So where does that leave the dollar now? And how should traders interpret its recent pullback in light of a potentially volatile Q2? Let’s break down the fundamentals, the technicals, and the macro undercurrents shaping what could be the dollar’s most pivotal quarter this year.

The Federal Reserve kept rates unchanged for the second consecutive meeting this year, holding the target range at 4.25%–4.5% following the cut in December. According to the latest dot plot, most policymakers still expect two rate cuts by year-end, maintaining the median projection at 3.75%–4.0%.

However, the March update showed a broader divergence in views. More members now support either no cuts or a single cut this year, while calls for aggressive easing (4–5 cuts) have disappeared entirely. This shift reflects the Fed’s more cautious stance and suggests no urgency to ease policy under current conditions.

Key Economic Projections:

• Growth forecast for 2024 downgraded from 2.1% to 1.7%
• Unemployment revised up to 4.4%
• Core inflation expectations ticked up to 2.8%

The removal of balanced risk language in the statement and the addition of “heightened uncertainty” inform us of a risk-sensitive Fed that’s focused on data, not political pressure. Chair Powell noted in the press conference that slower growth and persistent inflation partly offset each other, justifying the decision to maintain two cuts in the projection.

QT Tapering Slows, But Not Ending

Another major development: balance sheet runoff is slowing. The Fed will reduce its Treasury runoff cap from $60B/month to $50B starting April, after already cutting it to $25B last year. Meanwhile, the MBS cap remains unchanged at $35B.

Powell attributed the slowdown to concerns over Treasury liquidity and the debt ceiling, as the Treasury General Account (TGA) draws down. However, this move signals a more measured QT pace, not a pivot away from balance sheet normalization. The Fed’s balance sheet has already shrunk to $6.75 trillion, marking a multi-year low.

Bottom Line: Slower QT offers some relief to liquidity conditions, but it’s not a full reversal. The Fed remains in no rush to re-expand.

EUR Strength Driven by Equity Flows and Dollar Uncertainty

While the Fed holds back, the ECB has aggressively eased, cutting rates by 6 times since last June — most recently bringing the deposit rate from 4.0% to 2.5%. The Eurozone’s sluggish GDP growth has been the primary driver of this dovish path, even as inflation holds steady between 2%–3%.

Despite looser policy, the euro has outperformed. YTD, it’s posted the strongest gains among major currencies vs. the USD. This strength is fueled by:

• Diminished USD safe haven appeal, as Trump-era trade risks resurface
• Strong Eurozone equity performance, with capital flowing into European stocks as the S&P 500 falters
• Optimism around Germany’s €500B stimulus plan, boosting growth expectations

Conclusion: The EUR’s strength is less about ECB tightening and more about global capital reallocating amid U.S. policy volatility.

US Dollar Index (USDX): A Q2 Rebound on the Horizon?

The USDX is down 3.85% YTD, a sharp contrast to the rally seen after Trump’s election. From a technical perspective, the index topped out between late December and January, with a clear head formation on the daily chart.

Recent euro strength and tariff-related headwinds have weighed on the dollar. However, after falling sharply for two months, the USDX appears to have found support around 102.80 — a level worth watching.

Despite broad concerns, the U.S. macro picture hasn’t deteriorated significantly. Labor market and economic data remain stable. The Fed hasn’t pivoted dovish, and much of the bearish sentiment appears driven by policy headlines rather than fundamentals.

Key Takeaway: The market may be overreacting to political noise. If trade tensions ease or equity markets rebound, the dollar could follow.

Q2 Outlook: Key Risk – Trump’s Trade Policy

Markets are highly sensitive to the re-emergence of Trump’s tariff rhetoric. While these policies are often used as negotiating tools, they inject volatility into rates, equities, and FX alike.

If Trump signals more cooperative trade intentions in Q2 — especially toward Europe or China — risk sentiment could improve. Given his tendency to equate market performance with policy success, he’s unlikely to tolerate prolonged equity weakness.

Should equities bounce on softer trade talk, expect a USDX rebound, especially if EUR strength falters alongside.

Technical Outlook: A Turning Point for the USDX?

The US Dollar Index (USDX) has spent much of the first quarter under pressure, slipping nearly 4% year-to-date as macro sentiment soured and global equity flows rotated away from the dollar. After peaking near the 105.10–105.30 resistance zone in late December, the index has steadily pulled back, breaking beneath its 200-day moving average and carving out a rounded top formation on the daily chart — a pattern that often precedes deeper corrections.

Despite this weakness, there are signs that the index is beginning to stabilize. Over the past few weeks, USDX has found support near 102.80, a level that coincides with the mid-November reaction low and also aligns with a cluster of prior consolidations from Q3 2023. Price action has compressed in this region, with lower volatility suggesting an impending breakout — or breakdown.

From a momentum perspective, daily RSI has unwound from overbought conditions and is now approaching neutral territory, which may offer room for renewed strength if macro catalysts support the dollar. However, the medium-term structure still leans bearish unless USDX can reclaim and hold above 104.30–104.50, which marks the neckline of the rounded top and also coincides with the 50-day moving average and prior trendline support-turned-resistance.

Should price extend lower, the next level to watch sits near 101.90, which served as a key pivot in August and September of last year. A decisive break below this level would likely trigger bearish continuation toward the psychological 100.00 zone — a level not tested since July 2023 and often viewed as a sentiment anchor for USD bulls.

In the near term, all eyes remain on macro data and the tone of upcoming Fed commentary. While the dollar remains vulnerable to downside extension, any shift in risk sentiment, a rebound in U.S. yields, or stronger-than-expected data could prompt a technical bounce. For now, USDX appears to be sitting at an inflection point, with 102.80 acting as the critical fulcrum for Q2 positioning.