Where we are: The dollar index is trading near 118.15 in early New York trading, consolidating gains after a firmer overnight session. The DXY continues to benefit from the hawkish repricing, hovering near its highest levels since last week. Key resistance remains at 118.50, with support around 117.80, roughly where it closed yesterday in New York.
What’s driving it: The confirmation of Kevin Warsh as Fed Chair is the primary driver, stoking expectations for a more aggressive stance on inflation. The market is now fully pricing out any Fed rate cuts this year, and increasingly pricing in a rate hike, fueling the bid for the Greenback. The rise in US 2Y yields to 4% and 10Y yields to 4.46% continues to support the dollar, especially with real yields on TIPS pushing higher to 1.99%, adding pressure to gold. The Trump-Xi summit is adding a layer of uncertainty, but so far the market is focused on the domestic inflation picture and the Fed’s likely response.
- The 2s10s spread widened by 2bp to 0.48%, reflecting increased term premium.
- CFTC data shows net non-commercial USD positioning at +693 contracts, but it is still in the 83rd percentile. Given how crowded that long positioning is, there is squeeze risk on any disappointment in the data.
- The nomination of Warsh itself implies more rate hikes could be priced in, increasing support for USD
NY session focus: The focus is squarely on the 08:30 ET Retail Sales and Unemployment Claims releases. A strong print in either will reinforce the hawkish narrative and likely push the dollar higher, potentially testing 118.50. Weaker data, however, opens the door to a squeeze on those crowded USD longs. Pay close attention to the market’s reaction to the numbers. The trade continues to be long USD vs EUR or JPY, but the risk is that this gets faded quickly on a dovish surprise. The pain trade is a surprisingly weak inflation print that sparks a rapid unwinding of hawkish Fed bets.