Where we are: The Dollar Index (DXY) is currently trading around 118.05, marginally higher after oscillating in a tight range overnight. Key technical levels to watch are 117.80 as support and 118.30 as resistance. The DXY remains near levels last seen in early May but is struggling to gain significant traction above that recent high.
What’s driving it: The primary driver is the uncertainty surrounding the Fed’s future policy path. Despite the dot plot indicating two cuts in 2026, the market remains unconvinced, particularly with sticky core CPI and firm payroll data. This uncertainty is being reflected in the volatility of US Treasury yields, with the 2-year yield at 4% and the 10-year at 4.47%. Rising oil prices are adding further pressure to global inflation, complicating the Fed’s task of balancing inflation control with economic growth.
- The Fed’s reaffirmed data-dependent stance provides little clarity, making each data release a potential market mover.
- Rising 10-year real yields (currently at 2%) are providing a headwind for gold and a tailwind for the dollar, but the effect is muted.
- Speculator positioning remains crowded long in the dollar (+3,187 contracts, 85th percentile), increasing the risk of a squeeze if upcoming data disappoints.
NY session focus: The market will closely watch bond-market activity, with some analysts predicting a peak in Treasury yields near 5%, a level that could trigger a risk-on rally in stocks and bonds. Keep an eye on the 2s10s spread, currently at 0.5%, for clues about the market’s growth expectations. The trade that’s working is riding the yield curve steepening, but that’s at risk if inflation data surprises to the upside. The pain trade for the dollar is a dovish pivot from the Fed, fueled by a significant slowdown in the labor market and a sharp drop in inflation.