Where we are: The DXY is currently trading at 99.05, up +0.07% on the session, having ranged from 98.95 to 99.11 so far today. The index is holding above Friday’s close, consolidating last week’s gains driven by hawkish Fed repricing. Resistance looms around the 99.20 level, while support rests near 98.80.
What’s driving it: The primary driver remains the market’s assessment of the Fed’s policy path in the face of persistent inflation risks. While the Fed remains on a “patient hold,” the market is pricing in a greater probability of a rate hike before year-end as core CPI has been sticky and payrolls remain firm. This hawkish repricing is pushing up US real yields, with the 10Y TIPS yield rising to 2.18% last week, creating a headwind for gold and supporting the Dollar. Renewed geopolitical uncertainty surrounding Iran and peace talks is further contributing to risk aversion, providing a safe-haven bid for the Greenback.
- The US 10Y yield is currently trading at 4.486, down 2bp, while the 2Y sits at 4.059, down less than 1bp, keeping the 2s10s curve deeply inverted at 0.43%.
- Net non-commercial positioning in the Dollar is modestly short at -479 contracts, but this has decreased -3,666 w/w and is only at the 73rd percentile. A squeeze risk may be emerging if geopolitical risks persist.
- WTI crude at $112.25 continues to apply upward pressure on inflation expectations, complicating the Fed’s task.
NY session focus: All eyes will be on the 10:00 ET release of the CB Consumer Confidence data; a print below the 91.9 forecast could weigh on the Dollar. Key levels to watch are 99.20 on the upside and 98.80 on the downside. The trade that’s working remains fading risk rallies, but a surprise dovish shift from the Fed or significant progress in Iran peace talks could quickly unwind this. The pain trade would be a surge in risk appetite alongside a weaker-than-expected inflation print, forcing a rapid reversal of hawkish Fed bets.