Dollar Falls Back, Sentiment Turns Cautious
During Monday’s US trading session, the dollar weakened with the market exhibiting smaller fluctuations. Previously strong data and rising US Treasury yields had supported the dollar, but ahead of new inflation data, bullish momentum has cooled, leading to more range-bound trading and position adjustments.
Officials Signal Caution
After a 25-basis-point initial rate cut was mostly priced in, the Federal Reserve remains cautious about further easing. St. Louis Fed President Alberto Musalem, who has voting rights, cautioned that if policies should not become too accommodative, there is limited room for further rate cuts, citing the current loose financial environment and tariff-related inflation risks. Although not voting this year, Atlanta Fed President Raphael Bostic also expressed reluctance to support additional rate cuts, emphasizing continued dependence on data.
Yields Remain Stable, Awaiting Clues
The yield curve showed limited fluctuations: the 10-year around 4.145%; the 2-year slightly increased to 3.597%; and the 30-year near 4.772%. The bond market’s “wait-and-see” approach reflects a consensus awaiting key inflation indicators. Some Wall Street firms expect core PCE might not be as robust as previously feared, alleviating short-term pressure for further rate cuts, though it won’t change the data-dependent policy framework.
Key Variables: Core PCE and Powell
As the Fed's favored inflation metric, core PCE will directly impact policy path pricing by year-end. If readings continue to decline, the market might solidify the expectation of “two more cuts within the year, albeit at a moderate pace”; a sticky rebound, however, could provide the dollar with interim support, flattening the rate cut trajectory. Additionally, Powell’s speech on Tuesday will offer guidance on the “inflation risk–weak labor” balance, where hawkish tones might boost the dollar and lift front-end rates, while dovish remarks could reinforce the consolidation pattern.
Trading Perspective: Range Thinking and Event-Driven
Ahead of the data, funds lean towards “light positions and event-driven” trading. In the short term, the upper limit for the dollar is constrained by yields and policy communication, while the lower boundary is supported by US economic resilience and safe-haven demand, presenting a tug-of-war. Tactically, there is a preference for range trading around major moving averages and previous volatility bands, avoiding chasing after rallies or drops before data releases.
Risks and Scenarios
Upside Risks: Inflation higher than expected, more caution from officials regarding secondary inflation, rising fiscal and tariff variables boosting inflation expectations.
Downside Risks: Continued weakness in employment and demand, declining core services inflation, more dovish official communication.
Given the coexistence of risks at both ends, the dollar is more likely to consolidate, awaiting core PCE and Powell’s speech for directional signals before choosing a breakout.
Conclusion
At this stage, the dollar is in a “data and communication dual-anchored” observation period. Inflation paths and policy communication will determine the pace and extent of rate cuts within the year; consolidation remains the main theme until clear catalysts emerge, with event culmination marking the true turning point.
