Risk appetite improved across several asset classes, while rate expectations became less dovish, supporting the US Dollar Index. Market pricing for US rate cuts shifted as confidence grew in the near-term outlook and fears of mass unemployment eased.
The odds of a Federal Reserve rate cut by the June meeting fell below 50% for the first time this year, ending at 48%. This move followed core PCE returning to 3.0%, adding to doubts about an early cut.
Rates Repricing And Dollar Support
As rate cuts were priced out, US Treasury yields rose across the curve. The 2-year yield increased by 0.9bps to 3.47%, and the 10-year yield rose by 2.3bps to 4.05%.
The report also pointed to a soft 5-year US Treasury auction as another indication of changing rates conditions. The article notes it was produced with the help of an AI tool and reviewed by an editor, and it includes input curated by the FXStreet Insights Team.
We are seeing investors quickly pull back on bets for a Federal Reserve rate cut in the first half of this year. A surprisingly strong jobs report for January, which showed 265,000 jobs added, has reduced fears of any near-term economic slowdown. This, combined with sticky inflation, is creating a supportive environment for the US dollar.
Just a few weeks ago, the odds of a rate cut by the June meeting fell below 50% for the first time this year. Now, the CME FedWatch Tool shows those odds have collapsed further to just 35% as of this morning. The persistence of inflation, with the latest Core PCE data for January holding at a stubborn 2.9%, is forcing a major repricing of expectations.
Treasury Curve Volatility And Trade Positioning
As the market prices out these rate cuts, we are seeing significant moves in US Treasuries. The 2-year Treasury yield, highly sensitive to Fed policy, has climbed from around 3.47% to over 4.70% in recent weeks. This shift suggests traders are preparing for a ‘higher for longer’ interest rate environment, a stark contrast to previous assumptions.
For derivatives traders, this points toward strategies that benefit from a stronger dollar and higher yield volatility. Options on the US Dollar Index (DXY), which has already climbed to 104.50, could be used to position for further gains. We should also consider strategies on Treasury futures, like buying puts, to hedge against or speculate on yields continuing to rise.
This is a dramatic shift from the sentiment we saw in late 2025, when the market was pricing in multiple rate cuts for this year. Last year’s consensus was built on the expectation that inflation would fall much faster than it has. The current data challenges that entire narrative and forces us to be more nimble with our positions.
