Markets are rethinking US dollar rates after a volatile stretch and mixed US data. A DBS economist said 10-year US Treasury yields are near the bank’s short-term forecast of 4%.
DBS called the US economy “Goldilocks,” pointing to strong non-farm payrolls and a softer CPI. It said labour market data is the main factor that will decide how soon rate cuts can begin.
Fed Cut Timing Shifts Later
DBS has pushed back its expected timing for Federal Reserve cuts to the second half of 2026. It now forecasts two 25bp cuts: one in 3Q and one in 4Q.
On this path, DBS sees a terminal rate of 3.25%. Before, it expected one 25bp cut in 1Q, with a terminal rate of 3.50%.
This updated forecast depends on a labour market that cools at a moderate pace and inflation that keeps easing. The article also notes that political pressure from Trump to lower rates could play a role.
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
Markets are resetting expectations after recent volatility and uneven economic reports. The chance of a Fed rate cut before July 2026 has dropped sharply. This has forced investors to reprice derivatives such as Secured Overnight Financing Rate (SOFR) futures. Traders are now closing positions that assumed earlier policy easing.
The US economy still looks “Goldilocks.” The January 2026 jobs report showed a strong gain of 315,000 jobs. At the same time, the January CPI cooled slightly to 2.9%. This mix of solid job growth and softer inflation reduces the need for the Fed to act quickly, and it also lowers the risk the Fed needs to hike again.
If cuts are delayed, short-term yields could stay high over the next few months. That creates an opening for strategies such as selling short-dated call options on Fed Funds futures to earn premium as expectations reset. Markets are adjusting to “higher for longer,” at least through the first half of the year.
With 10-year Treasury yields sitting just below 4%, that level is a key line for the market. A clear break above it could lead to a broader sell-off in bond futures and hit long-duration positions. We are watching options activity in 10-year Treasury note futures for signs that large players are taking firm positions.
Because the Fed remains data-driven, implied volatility in rate options may stay supported. The MOVE index, which tracks Treasury volatility, has risen to 115. That reflects uncertainty around when the first cut will arrive. Traders should expect sharp moves around key inflation and jobs releases.
This pattern is not new. Much of 2025 saw markets repeatedly bet on early cuts, only to push those bets back as growth stayed resilient. The lesson was clear: do not front-run the Fed when the labour market is still this strong.
DBS’s revised view—cuts in 3Q and 4Q—still depends on the economy cooling further. Investors also need to weigh possible political pressure to ease policy later in the year. That makes the timing of any Fed move harder to forecast.
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