Deutsche Bank’s Macro Strategy report indicates a positive outlook for the US Dollar due to strong economic data. The ISM manufacturing index unexpectedly increased, fostering optimism for 2026. The Dollar Index rose by 0.66%, achieving its best two-day performance since last spring.
US Treasury markets reacted clearly to the ISM data, with yields rising as the likelihood of Federal Reserve rate cuts diminished. Futures had previously priced in an 87% chance of a rate cut by the June FOMC, which fell to 70% by the close. Higher yields consequently supported the Dollar Index’s growth.
Analysis of ISM Manufacturing Data
The recent surge in the ISM manufacturing index to 52.1 shows the economy is running hotter than we anticipated. This unexpected strength is forcing a rethink of when the Federal Reserve might begin cutting rates this year. As a result, the market’s expectation for a rate cut by the June meeting has now fallen significantly.
Higher US Treasury yields are making the dollar more attractive to hold, pushing the Dollar Index up towards the 104.50 level. This marks the strongest two-day performance for the currency since we saw similar volatility back in the spring of 2025. We believe this trend could continue if upcoming data confirms this economic resilience.
Strategies for Traders
For options traders, this shift suggests buying call options on the US Dollar, or put options on currencies like the Euro or Yen. With the path of the Fed now less certain, we can expect implied volatility on currency pairs to increase in the coming weeks. Consider strategies that benefit from a stronger dollar, such as buying USD/JPY calls, as the interest rate difference between the US and Japan widens.
This view is supported by the latest jobs report, which showed a solid 225,000 jobs were added in January, beating all expectations. Traders using futures should be cautious about being short the dollar, as momentum is clearly building. With core inflation from late 2025 still hovering above 3%, the data gives the Fed very little reason to rush into easing policy.
