Where we are: The Dollar Index is hovering around 118.73, little changed from yesterday’s close, within an overnight range of 118.65 and 118.80. The index remains underpinned by solid US yields, with the 2-year at 3.92% and the 10-year at 4.42%. Technically, the DXY is holding above its 50-day moving average, suggesting a bias for further gains, but faces stiff resistance at the 119.00 level.
What’s driving it: Dollar strength is primarily driven by the market’s continued belief in a patient Fed, despite growing dissent within the committee as highlighted by CNBC reports of members disagreeing with hinting at future cuts. The Treasury yields remain firm, as investors digest recent GDP and inflation data, with the 10-year real yield climbing to 1.96%, providing additional support to the dollar and acting as a headwind for gold. The crowded long positioning in the dollar leaves it vulnerable to a squeeze on any dovish surprises.
- The Fed’s data-dependent stance, reaffirmed at the last meeting, keeps the market focused on incoming economic data.
- US 10-year real yields are rising, reaching 1.96%, bolstering the dollar’s appeal.
- CFTC data shows net non-commercial positions are at the 94th percentile, highlighting the risk of a short squeeze if data disappoints.
NY session focus: All eyes are on today’s ISM Manufacturing PMI and ISM Manufacturing Prices data at 10:00 ET. A stronger-than-expected print, particularly on the prices component (forecast 80.0 vs. previous 78.3), would likely fuel further dollar strength, targeting the 119.00 level and potentially triggering a squeeze on existing USD shorts. Conversely, a weaker-than-expected report would challenge the Fed’s patient hold narrative, pushing the DXY back towards 118.00. The trade that’s working is long USD vs. EUR, but the trade at risk is long USD vs. JPY given recent intervention risks. The pain trade is a significant dovish surprise from the data triggering a sharp dollar sell-off.