Where we are: The DXY is currently trading at 98.36, down 0.31% on the session and near the low end of its intraday range of 98.32-98.75. This represents a notable shift from the previous New York close, and the dollar index has given up a good portion of its weekly gains. The move lower is being mirrored in the US Treasury market, where both the 2-year and 10-year yields are sharply lower, with the 2-year at 3.785% and the 10-year at 4.302%.
What’s driving it: The primary driver appears to be a reassessment of the Fed’s rate path, fueled by reports of potential progress in US-Iran talks and an extension of the ceasefire in Lebanon. This is easing geopolitical concerns related to oil supply and inflationary pressures, leading traders to price in a higher probability of rate cuts later in the year. Also Warsh possibly stepping into the position as Fed chair. The crowded long positioning in the dollar, as evidenced by the 94th percentile net non-commercial positioning, amplifies the downside risk should these narratives gain further traction.
- “Don’t count on rate cuts just yet: Warsh as Fed chair may not lead to big policy changes” – AP News.
- US 2Y Yield: 3.785% (-0.059, -1.53%) intraday decline indicates a significant shift in near-term rate expectations.
- Net non-commercial USD positioning at 94th percentile suggests a potential squeeze scenario if the bullish narrative falters.
NY session focus: Traders will be closely monitoring risk sentiment. Further positive developments in the Middle East could exacerbate the dollar’s decline. Key levels to watch on the downside are the 98.00 and 97.50 marks on the DXY. Keep an eye on S&P 500 futures at 7194.75 and Nasdaq futures at 27435.00 as leading indicators. The trade that’s working is short USD vs. risk assets. The trade at risk is long USD based on geopolitical tensions. Trump’s speech at 17:00 London could introduce further volatility, particularly regarding ceasefire details. The pain trade here is a sudden reversal in risk sentiment, sending the crowded dollar longs scrambling to cover.