Markets are reassessing US dollar rates after volatility and mixed US data. A DBS economist said 10-year US Treasury yields are close to a near-term forecast of 4%.
The US economy was described as “Goldilocks”, with strong non-farm payrolls and softer CPI. Labour market data is presented as the key factor shaping how soon rate cuts might start.
Fed Cut Timing Shifts Later
DBS has shifted its expectation for Federal Reserve cuts into the second half of 2026. It now projects two cuts of 25bps, one in 3Q and one in 4Q.
Under this path, the projected terminal rate is 3.25%. The previous view was a single 25bps cut in 1Q, with a terminal rate of 3.50%.
The updated forecast is conditional on a moderate labour market and continued easing in inflation. The article also notes that political pressure from Trump to lower rates may be a factor.
The piece was produced using an AI tool and reviewed by an editor, and was published by the FXStreet Insights Team.
Market Pricing And Strategy Implications
Market expectations are being reset after a period of volatility and mixed economic reports. The probability of a Federal Reserve rate cut before July 2026 has collapsed, forcing a repricing in derivatives like Secured Overnight Financing Rate (SOFR) futures. Traders are now unwinding positions that had banked on earlier monetary easing.
The US economy appears to be in a “Goldilocks” phase, with the January 2026 jobs report showing a robust 315,000 new jobs. At the same time, the latest Consumer Price Index for January cooled slightly to 2.9%, which keeps the Fed from needing to consider more hikes. This combination of a strong labor market and benign inflation removes any urgency for the central bank to act immediately.
This delay in cuts suggests the front end of the yield curve will remain elevated for the next few months. We see this as an opportunity to look at strategies like selling short-dated call options on Fed Funds futures to collect premium from the repricing. The market is settling into a “higher for longer” reality through at least the first half of the year.
With 10-year Treasury yields now hovering just below the 4% level, this has become a critical pivot point for the market. A sustained move above this could trigger a wider sell-off in bond futures, impacting long-duration positions. We are watching options activity around the 10-year Treasury note futures for signs of conviction from larger players.
Given this data-dependent stance from the Fed, implied volatility on interest rate options is likely to stay supported. The MOVE index, a key gauge of Treasury market volatility, has already climbed to 115, reflecting the uncertainty around the timing of the first cut. Traders should be prepared for sharp reactions to upcoming inflation and employment data releases.
This situation is familiar, as we saw a similar pattern throughout much of 2025. During that time, market optimism for early rate cuts was consistently pushed back by resilient economic performance. That experience taught us not to get ahead of the Fed when the labor market remains this firm.
The revised forecast for cuts in the third and fourth quarters of this year is contingent on the economy continuing to moderate. We also must consider the potential for political pressure to ease policy as the year progresses. This adds another layer of complexity to predicting the precise timing of any central bank action.
