Where we are: The DXY currently trades around 119.35, buoyed by a persistent bid in US Treasury yields. Overnight, the index traded in a narrow range, consolidating gains from earlier in the week. The index remains above the 119.28 level last seen Friday, having broken above that on Tuesday’s close.
What’s driving it: The primary driver remains the expectation of a continued, patient hold from the Federal Reserve. The market is reacting to sticky inflation concerns, particularly as evidenced by yesterday’s rise in front-end yields. With the Fed reaffirming its data-dependent stance and the dot plot suggesting only two cuts in 2026, the path of least resistance for the dollar remains upward, especially if inflation pressures persist and crude remains above $112. The recent easing in 10-year breakeven inflation to 2.44% is a mild headwind, but overshadowed by the firming in real yields.
- The 2-year Treasury yield sits at 4.13%, up 6bp yesterday, reflecting market pricing of continued Fed patience.
- Speculative positioning is net long at the 85th percentile, increasing the risk of a squeeze if economic data disappoints.
- Gold is under pressure due to the rising dollar and yields, hinting at a risk-off dynamic at play.
NY session focus: The market will be closely watching this morning’s 08:30 ET releases of the Philly Fed Manufacturing Index and Unemployment Claims. A weaker-than-expected Philly Fed print could trigger a minor pullback, while a strong showing would reinforce the dollar’s upward trajectory. Later, the 09:45 ET Flash Manufacturing and Services PMIs will provide further insight into the health of the US economy. Key levels to watch are 119.50 as resistance and 119.00 as support. The prevailing trade remains buying dips in the DXY, but the squeeze risk on short USD positions is real. The pain trade is a sharp reversal in yields driven by dovish comments or a weak payrolls report next week.