Where we are: The DXY is trading around 101.37, down slightly on the session but holding firm after yesterday’s dip. We’ve seen some consolidation after yesterday’s broad-based dollar weakness, with the index still poised for a weekly gain. The overnight range has been tight, and we’re currently sitting just above the prior New York close.
What’s driving it: The Federal Reserve’s hawkish hold remains the dominant narrative, with Chair Warsh’s recent statement stripping out any easing bias and the dot plot signaling a potential hike this year. This is underpinning the Dollar despite a slight pullback in US yields yesterday. Elevated inflation, driven by the Middle East energy shock, provides the Fed with room to maintain this stance, requiring cooling inflation and labor market data to neutralise the hike risk.
- The Fed Funds Target Range remains at 3.50-3.75%, with the latest statement and dot plot clearly signalling a hawkish bias.
- US 2Y yields are down 5bp to 4.11% and 10Y yields are down 9bp to 4.41% as of yesterday’s NY close, but the Fed’s rhetoric is providing a floor under the Dollar.
- Speculative positioning shows a crowded long in USD futures, with net non-commercials at +12,928 contracts, increasing squeeze risk on any disappointment.
NY session focus: Today’s US calendar is light on high-impact data before the New York open, with only the Revised UoM Consumer Sentiment and Inflation Expectations due at 10:00 ET. President Trump’s speech at 13:30 ET could introduce volatility, particularly if it touches on trade or Fed policy. The market is currently pricing in a high probability of a September Fed hike, and any data that reinforces sticky inflation or a tight labor market will likely see this priced in further, supporting the Dollar. The pain trade here is a significant drop in US yields coupled with dovish Fed commentary, which would likely trigger a sharp unwind of crowded USD longs.