Where we are: The DXY is trading up 0.32% on the day at 101.73, pushing higher after a strong overnight session that saw it hit 13-month highs according to wire reports. This move has extended the Dollar’s gains from yesterday, where it saw a significant uptick. We’re currently sitting above yesterday’s New York close, with US yields showing a slight dip overnight but still elevated overall.
What’s driving it: The primary driver remains the Federal Reserve’s hawkish pivot. The recent statement, coupled with the removal of the easing bias and a dot plot that now signals a possible hike this year, is firmly underpinning the Dollar. This is amplified by elevated inflation near 4%, driven by the Middle East energy shock, which necessitates a cooling in inflation and labour markets to neutralise the hike risk. While crude oil prices have pulled back, the Fed’s stance is the dominant force, with US 2Y yields up 5bp yesterday and 10Y yields also firming.
- The Fed Funds Target Range remains at 3.50-3.75%, but the narrative has shifted decisively hawkish under Chair Warsh.
- US 10Y Real Yields are on the rise, currently at 2.28% and up 7bp yesterday, acting as a headwind for gold but a tailwind for the Dollar.
- Speculative positioning shows a crowded long in USD futures, with net non-commercials at +13,197 contracts, presenting squeeze risk on any disappointment.
NY session focus: The key event today is the 08:30 ET release of US data, which will be crucial for confirming or refuting the market’s aggressive Fed hike bets. Options market activity suggests some skepticism about the pace of tightening, so any data that deviates from expectations could trigger significant volatility. We’re watching for any further moves in US yields, particularly the 2s10s spread which widened 7bp yesterday to 0.34%. The trade that’s working is long Dollar, but this is at risk if today’s data prints softer than anticipated. The pain trade for this asset would be a sharp reversal in Fed expectations driven by weaker-than-expected US inflation prints.