Where we are: The DXY is currently trading at 98.26, up 0.26% on the day, having traded in a range of 97.83-98.42 so far. The index is testing resistance around the 98.00 level and has pushed higher against the prior NY close of 118.3926 (USD Broad Index). Bullish momentum is building.
What’s driving it: Safe-haven demand is supporting the Dollar amidst escalating tensions in the Middle East. The market fears a potential derailment of the US-Iran ceasefire and is pricing in a potential Fed response of further tightening to contain any resultant inflationary pressures. Domestically, the Fed remains in a patient hold stance, dependent on further disinflation in core services and a cooling in labor costs. The latest dot plot suggested only two cuts in 2026, reinforcing the hawkish narrative.
- The 10Y Breakeven Inflation rate rose 2.0bp to 2.5%, further fueling rate-hike expectations.
- US forces repelled Iranian attacks in the Strait of Hormuz.
- CFTC data shows net non-commercial Dollar longs at the 92nd percentile, signaling squeeze risk if sentiment shifts.
NY session focus: All eyes are on the 10:00 ET releases of ISM Services PMI (forecast 53.7), JOLTS Job Openings (forecast 6.86M), and New Home Sales (forecast 652K). Traders will scrutinize these releases for clues on the health of the US economy and their potential impact on Fed policy. A beat on the ISM could see the DXY testing 98.50, while a miss could trigger a pullback towards 97.80. The trade that’s working is fading risk-on rallies. The trade at risk is shorting the Dollar at these levels, given geopolitical uncertainty. The pain trade is a dovish surprise from the data, triggering a sharp Dollar sell-off and a risk-on surge.