Where we are: The Dollar Index (DXY) is currently hovering around 98.15, having traded in a tight overnight range of 98.00-98.25. This is slightly above Friday’s NY close. Key technical resistance lies at 98.50, with support around 97.80.
What’s driving it: All eyes are on today’s US CPI release at 08:30 ET. The Fed’s patient hold hinges on continued disinflation, making this data pivotal. Forecasts suggest an uptick in CPI y/y to 3.7%, and a firm print would push back expectations of Fed cuts, supporting the dollar. The market is already positioned somewhat long USD, so a weak print carries squeeze risk. Recent Fed speak has been relatively quiet, though Governors Waller and Cook both spoke on Friday, but their comments were backward-looking. The recent rise in breakeven inflation, now at 2.47%, further underscores the sensitivity of the market to inflation data.
- The market is net long USD, at the 83rd percentile (52w), increasing the probability of a squeeze if the data misses.
- 10Y breakeven inflation rose 2bp on Monday to 2.47%, suggesting inflation expectations remain elevated.
- The Warsh Fed Chair nomination cleared a Senate hurdle overnight, suggesting some continuity in monetary policy direction is likely, but the market’s focus is squarely on the CPI data this morning.
NY session focus: The core event today is the 08:30 ET US CPI release. A higher-than-expected print will likely see the DXY test 98.50 resistance and potentially push towards 99.00, while a downside surprise could trigger a squeeze towards 97.50. The 11:59 ET Fed Chair Nomination Vote is largely priced in, but any unexpected issues could add volatility. The trade that’s working is fading USD rallies ahead of data releases. The at-risk trade is short USD into this CPI print. The pain trade is a substantial upside surprise on core CPI, forcing a rapid repricing of Fed expectations and a significant dollar short squeeze.