Where we are: The DXY currently trades around 99.00, near the upper end of its overnight range. This marks a significant move higher from yesterday’s New York close, and puts the Dollar on track for its best weekly performance since March. Key resistance lies at the 99.20 level, a break of which could trigger further upside.
What’s driving it: Mounting inflationary pressures in the US are solidifying expectations for a potential Fed rate hike later this year. Even though the Fed has maintained a patient hold, reaffirming its data-dependent stance, the market is reacting to sticky inflation data and resilient consumer demand. The recent wholesale and consumer price data fueled these hawkish expectations. Hawkish overnight comments from Fed officials Barr and Bowman added conviction to the view that balance sheet shrinking is no longer the main priority.
- The US 2Y yield closed at 3.98% on Tuesday, down 2bp on the day.
- The dollar index is on track to post a weekly gain of more than 1%.
- CFTC data shows net non-commercial positions in the US Dollar are at +693 contracts, near the 83rd percentile of their 52-week range. This crowded long positioning raises the risk of a squeeze on any dovish surprises.
NY session focus: All eyes will be on any further commentary emerging from the high-level talks between President Trump and Chinese President Xi Jinping. We are watching for any explicit mention of the Dollar or trade disputes. Key levels to watch are 99.20 on the upside and 98.75 on the downside. The trade that’s working is fading dips in the dollar, given the strong momentum. The risk lies in a surprise dovish turn from the Fed, despite recent data. The pain trade is a sharp reversal in the DXY towards 98.00 if the market misinterprets the data.