Where we are: The Dollar Index (DXY) is steadying around 99.70 in early London trading, paring some of yesterday’s losses after the US-Iran peace deal announcement triggered a risk-on wave. We are holding just above key near-term support at 99.50, keeping the index within striking distance of last week’s highs. Meanwhile, Treasury yields are creeping up, with the 2-year sitting at 4.09% and the 10-year at 4.48%, reflecting a market that is refusing to price in any imminent easing ahead of tomorrow’s landmark FOMC decision.
What’s driving it: The domestic focus is entirely locked on the Federal Reserve’s upcoming policy meeting, where newly minted Chair Kevin Warsh is expected to maintain a patient hold in the 4.25% to 4.50% target range. Domestic interest rate expectations are shifting hawkishly, with the street increasingly betting that the FOMC will officially excise its easing bias from the policy statement. This policy shift is reinforced by sticky core inflationary pressures that have kept the US 10-year real yield elevated at 2.17%, a development that continues to act as a structural headwind for non-yielding assets. US asset prices are also adapting to broader global developments, including the Bank of Japan hiking its policy rate to a 31-year high of 1.00% to combat geopolitical inflation, and Monday’s surprise US-Iran peace agreement which temporarily took the geopolitical premium out of crude oil.
- The Federal Reserve’s policy bias is poised for a hawkish recalibration under Chair Warsh, with market consensus shifting toward a complete removal of the easing bias from tomorrow’s statement.
- US real yields remain highly supportive of the greenback, with the 10-year TIPS yield holding firm at 2.17% and the 10-year breakeven inflation rate sitting at 2.32%.
- Speculative positioning in the dollar has reached a crowded long profile at the 81st percentile of its 52-week range, creating a substantial squeeze risk if tomorrow’s FOMC fails to validate the hawkish shift.
NY session focus: As the New York session opens, we expect tight range-bound trading ahead of tomorrow’s 14:00 ET FOMC decision, with immediate resistance for DXY at 100.20 and critical support at 99.50. The trade that continues to work is selling rallies in currencies with active dovish divergence, while the short-DXY momentum trade sparked by the Iran peace deal looks increasingly at risk of stalling near these yield levels. A failure of the Fed to sound sufficiently hawkish tomorrow is the primary risk to the current long-USD consensus. The pain trade is a swift unwind of crowded dollar longs back down toward the 98.80 support zone if Warsh keeps the door open to rate cuts later this year.