The US Dollar finds itself at a crossroads, displaying a nuanced performance across various currency pairs. On Tuesday, during the European trading hours, the greenback exhibited a patchy trajectory, retreating slightly from the modest gains recorded on Monday.

In recent sessions, the USD has shown resilience against major Asian currencies such as the Japanese Yen. This positive market sentiment is largely attributed to the easing of geopolitical tensions in the Middle East, which has led to a retreat from safe-haven assets.

However, the US Dollar Index (DXY), which tracks the greenback against a basket of major currencies, experienced a significant decline last week. This drop saw the DXY breach several critical support levels, as market participants adjusted their expectations regarding Federal Reserve policy. The current market consensus anticipates a series of aggressive rate cuts by the Fed, potentially starting in September. The recent rebound in the DXY on Monday might be indicative of a recalibration in these expectations, suggesting that the markets could have overestimated the extent and pace of forthcoming rate reductions.

Looking ahead, today’s economic calendar features two pivotal releases. The Housing Price Index for June will be scrutinized for insights into the housing sector's health. Additionally, the Consumer Confidence Index for August is poised to offer a snapshot of consumer sentiment. Following the robust Durable Goods Orders data from Monday, there is optimism that the Consumer Confidence Index will reflect continued consumer optimism.

The trajectory of US monetary policy remains a central theme for currency markets. According to interest rate futures, the probability of a 50-basis point rate cut in September stands at 29%, with a greater likelihood of a 25-bps cut. This data suggests that while a significant reduction is on the table, a more moderate adjustment is also a strong possibility. Recent comments from Fed officials, including San Francisco Fed President Mary Daly, indicate a preference for a 25-bps cut, though she has not entirely ruled out a larger reduction if economic conditions warrant it.

The European Central Bank is expected to cut interest rates in September, with further reductions anticipated in the final quarter of the year. This speculation is driven by easing inflationary pressures and a cloudy economic outlook in the Eurozone. Investors are keenly awaiting the Harmonized Index of Consumer Prices data for August, due on Friday. Forecasts suggest a deceleration in both headline and core HICP inflation, which may reinforce expectations of additional ECB rate cuts. This presents major near-term downside risk for the EURUSD, hence upside potential may be limited:

Softer-than-expected inflation could amplify market anticipation of further ECB easing, exerting downward pressure on the Euro. Conversely, unexpectedly strong inflation data could temper these expectations, providing a lift to the Euro.