USD Index vulnerable as market correlations hit seasonal lows

The US Dollar Index faces heightened volatility risks as market correlations reach seasonal lows, signaling potential sharp moves across major forex pairs. EUR/USD remains a key focus as diverging asset class behaviors create unpredictable trading conditions. S&P 500 futures and dollar correlations have weakened significantly, breaking traditional risk-on/risk-off patterns that typically guide currency flows. This decorrelation suggests increased market fragmentation, with individual currency pairs potentially moving independently of broader market trends. Technical analysis shows the Dollar Index testing critical support at 104.50, while EUR/USD hovers near 1.0850 resistance. The unusual market dynamics warrant cautious positioning, as traditional hedging strategies may prove less effective. Traders should prepare for potentially outsized moves in major pairs, with particular attention to upcoming earnings reports and economic data releases that could trigger volatility spikes.