Takeaway

The presenter highlights a significant market shift, with Fed expectations swinging from multiple cuts to approximately four hikes priced by June of next year. While this has supported an improving technical picture for the Dollar Index (DXY), the presenter cautions that historical precedents (notably 1994 and 1999) show the dollar can weaken into a tightening cycle even as front-end yields rise. The current, extremely high correlation between the DXY and 2-year yields is therefore a key factor to watch.

What the presenter said

• Markets widely expect the Federal Reserve to begin a meaningful tightening cycle this week. [00:04]
• The presenter argues that history shows higher front-end US rates do not necessarily lead to a stronger US dollar. [00:09]
• Market pricing has swung from multiple rate cuts this year to favoring around four hikes out to June of next year. [00:16]
• In every modern tightening cycle, the US 2-year Treasury yield was higher at the time of the first hike than it was three months prior. [01:16]
• Unusually, the DXY is lower over the comparable pre-hike period in the current cycle, whereas it generally strengthened in most previous cycles. [02:02]
• The presenter suggests the 1994 and 1999 cycles are the most relevant analogs, as the Fed started near a neutral policy setting; in both cases, the dollar weakened even as the 2-year yield rose. [02:26]
• The short-term correlation between the DXY and the US 2-year yield is near historical extremes, with the 12-week measure sitting in the 97th percentile. [03:20]
• The relationship has been asymmetric: the dollar has fallen significantly when front-end yields dropped, but has risen on a much smaller scale when yields backed up. [03:49]
• From a technical perspective, the directional risk for the dollar looks sideways to higher heading into the Fed meeting. [05:30]

Trade ideas

No actionable trade was put forward. The presenter's market view is that while DXY technicals point sideways-to-higher into the upcoming Fed meeting, historical analogs suggest the dollar could weaken even as front-end yields rise.

Levels and data cited

Price Levels (DXY): * Resistance: 99.42 (38.2% Fib of Jan-Jun move), 100.00 (50-day MA & psychological level), 100.50. * Support: 98.58 (lower bound of a zone with the 50% Fib), 97.65, 97.34.

Data Cited: * Fed Policy: Markets are pricing 3.5 equivalent 25bp rate hikes by June 2027. * Correlations: The rolling 12-week correlation of weekly changes in DXY and the US 2-year yield is +0.79, which is in the 97th percentile historically. * Historical Cycles: In all six modern tightening cycles post-1994, the US 2-year yield was higher at the first hike than 3 months prior.

Risks and what would invalidate this

• High yields failing to deliver sustained dollar upside.