Where we are: The Dollar Index is currently trading at 98.61, up +0.19% on the session. Overnight, the DXY has traded in a tight 98.41-98.63 range, consolidating gains after yesterday’s risk-off move. Current levels are holding above last week’s close but the market is in wait-and-see mode ahead of the Fed.
What’s driving it: The dollar is catching a bid on safe-haven flows as risk sentiment sours, with stocks falling and oil rising amid persistent inflation worries. Domestically, all eyes are on the Fed’s decision and statement due at 14:00 ET, as well as Chair Powell’s press conference at 14:30 ET. The market broadly expects the Fed to hold rates steady in the 4.25-4.50% range, but the focus is on forward guidance and any hints about the timing of potential rate cuts given the still-sticky inflation picture.
- US 10Y Real Yields have been rising to 1.91%, which traditionally acts as a headwind for gold.
- The US 2Y yield is up 3.3bp on the day to 3.879, signaling a potential re-think on the Fed’s rate cut trajectory.
- Speculator positioning in the Dollar Index is crowded long, at the 94th percentile, raising the risk of a sharp squeeze lower if the Fed strikes a more dovish tone than anticipated.
NY session focus: Traders are squarely focused on the Fed events at 14:00 ET and 14:30 ET, with any deviation from the expected hold potentially triggering significant volatility. Key levels to watch are 98.40 as intraday support and 98.80 as resistance. The flattening 2s10s curve suggests the market is bracing for a potential policy mistake. The working trade is to fade any initial hawkish reaction to the Fed, given the crowded long positioning. The pain trade is a hawkish surprise that triggers a dollar squeeze and a sharp sell-off in risk assets.