This narrative this year was supposed to be the demise of the US dollar. The disinflation push and rate cuts by the Fed was supposed to pave the way for that. And yet here we are, with the dollar rising to its best levels in two months after the US CPI data here.
After all the aggressive pricing on rate cuts in November and December, this wasn’t supposed to be part of the script.
As things stand, March is officially ruled out now and odds of a May rate cut have dwindled down to just ~41%. As for the year itself, traders are now pricing in just 91 bps of rate cuts by the Fed. That largely pales in comparison to the 156 bps worth of rate cuts priced in at the end of last year here.
If you ever need a reminder that nothing is a given in markets, this has been a good example of that. As mentioned at the end of last year:
“If there is going to be reason to run all of that back i.e. aggressive rate cuts pricing, the correction/retracement can be quite a forceful one in favour of the greenback.”
The question now is, are we going to see the squeeze continue to play out?
I would argue that the technicals will have to be the one to answer that. 10-year Treasury yields may be up to 4.31% but is facing key resistance from its 100-day moving average near 4.34%. That might keep a lid on things, at least until we get more data points to work with.
Besides that, EUR/USD is also flirting with a break below its December low of 1.0723. However, there looks to be some indecision in chasing a push under 1.0700 for now. Then, there is gold which broke back below $2,000 but is finding support from its 100-day moving average at $1,989.90.
If the dollar is to chase the next leg higher, there needs to be a significant technical push across multiple borders.
