Where we are: The Dollar Index is currently trading around 119.10, slightly below Friday’s close. The Greenback saw an overnight drift lower as risk sentiment improved, driven by perceived progress in Middle East peace talks. Key support lies around the 118.80 level, while resistance is at the recent high of 119.50. The move aligns with a mild risk-on tone across global markets this morning.
What’s driving it: Dollar weakness is primarily a function of easing inflation concerns tied to a potential US-Iran agreement, as well as the pullback in oil prices. Last week, the Dollar climbed on speculation that the Fed might need to tighten further, with traders pricing in a rate hike by year-end. However, the positive headlines around the Strait of Hormuz have tempered those hawkish expectations, although President Trump said Washington would keep its blockade of the strait in place until a formal agreement is reached. Today’s price action suggests the market is taking a “wait and see” approach to this geopolitical news, while also scaling back some hawkish Fed bets.
- US 2Y yield at 4.08%, up 4bp on the week, suggesting the curve is pricing a slower pace of easing than earlier in May.
- Real rates continue to push higher; 10Y TIPS yield at 2.18% as of Friday, up 5bp on the day – a headwind for gold.
- CFTC data (week of May 19th) shows speculators are modestly short the Dollar, at the 73rd percentile, reducing squeeze risk.
NY session focus: With US markets closed today for a public holiday, expect liquidity to be thinner and price action potentially exaggerated on any fresh headlines. Watch for further developments regarding the US-Iran situation; any setbacks could quickly reverse the recent Dollar weakness. Key levels to monitor are 118.80 support and 119.50 resistance. The working trade seems to be fading Dollar strength, while the trade at risk is shorting the Dollar aggressively given the Fed’s still-hawkish stance. The pain trade would be a hawkish surprise on PCE inflation data later this week, reigniting rate hike bets and sending the Dollar sharply higher.