Where we are: The DXY currently sits at 97.69, down 0.22% on the session, trading near the low end of its intraday range of 97.68-97.93. Yesterday’s close in New York was closer to 97.90, so we’re starting the NY day on the back foot. The dollar is catching a bid from a slightly weaker open in risk assets, attempting to find support around the 97.65 level.
What’s driving it: The primary driver for the dollar’s weakness remains the easing of geopolitical tensions surrounding the Middle East, specifically the increased probability of a US-Iran agreement. This risk-on sentiment is weighing on safe-haven demand for the greenback. Even with this backdrop, the Fed remains in a patient hold, awaiting further evidence of disinflation in core services and labour-cost moderation before considering rate cuts. The market is pricing in increased chances of rate cuts, though, which is pressuring the dollar. The 10-year breakeven inflation rate declining 5bps yesterday hints at cooling inflation expectations.
- The US 2-year yield is down 4bps today to 3.834%, reflecting expectations of near-term rate cuts.
- 10Y real yields (TIPS) rising 1bp to 1.96% present a headwind for gold.
- Speculator positioning is crowded long, with net non-commercial contracts at +4,508. At the 92nd percentile, the DXY is ripe for a squeeze on any further dovish surprises.
NY session focus: All eyes will be on the 08:30 ET Unemployment Claims release, with the forecast at 205K versus the previous 189K. A higher-than-expected print could provide a temporary boost to the dollar. Key levels to watch are 97.50 on the downside and 98.00 on the upside. The short USD/JPY trade remains compelling, while long USD/CAD is vulnerable. The pain trade remains a re-escalation of Middle East tensions, reigniting the dollar’s safe-haven appeal.