Markets are eagerly awaiting the first rate cut from the Fed, and all eyes will be on inflation data tomorrow.
Ahead of the release, the US dollar has started the week trading sideways. Last week, the dollar index rose to 104.6, a level not seen since November, before pulling back to the 104 mark.
Despite this retreat, the greenback managed to sustain its position near the three-month highs, remaining within range of the critical resistance point.
However, the spike in 2-year and 10-year yields last week was a factor that partially supported the dollar.
Morgan Stanley Research analysts, on the other hand, once again mentioned the high correlation in their note on the relationship between the dollar and government bonds. They said that long-term bond auctions, especially 10 and 30-year bond auctions, tend to have an impact on the dollar.
The fact that the dollar currently offers higher real rates than major currencies and even some emerging markets continues to stand out as another factor that maintains its attractiveness.
On the other hand, although the Fed's extremely cautious stance on interest rate cuts supports the narrative that interest rates may remain high for much longer, the US dollar's slowly building momentum is noteworthy.
The cautious increase in demand for the dollar may be repositioned with new positions to be taken with the inflation data.
Accordingly, if inflation data comes in below expectations, this will strengthen the markets' narrative that the Fed may cut interest rates earlier, and in this case, we may see a weakening in the dollar.
Otherwise, it is more likely that demand for the dollar could rise rapidly and break through its critical resistance.
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