Risk appetite rose across several asset classes. At the same time, expectations for rate cuts became less dovish, which helped support the US Dollar Index. Markets reduced the amount of Fed easing they had priced in as confidence in the near-term outlook improved and fears of widespread unemployment eased. For the first time this year, the probability of a Federal Reserve rate cut by the June meeting dropped below 50%, ending at 48%. This followed core PCE coming in at 3.0%, which increased doubts about an early cut.

Rates Repricing And Dollar Support

As markets priced out rate cuts, 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 flagged a weak 5-year US Treasury auction as another sign that rate conditions are shifting. It notes the article was produced with help from an AI tool, reviewed by an editor, and includes input curated by the FXStreet Insights Team. Investors have been pulling back quickly on bets for a Federal Reserve rate cut in the first half of the year. A stronger-than-expected January jobs report, showing 265,000 jobs added, reduced fears of a near-term slowdown. Combined with stubborn inflation, this has created a supportive backdrop for the US dollar. A few weeks ago, the odds of a June rate cut fell below 50% for the first time this year. Now, the CME FedWatch Tool shows those odds have dropped further to 35% as of this morning. Inflation is still proving sticky, with January Core PCE holding at 2.9%, forcing a major repricing of expectations.

Treasury Curve Volatility And Trade Positioning

As the market removes expected rate cuts, US Treasury moves have been large. The 2-year Treasury yield, which is very sensitive to Fed policy, has climbed from around 3.47% to over 4.70% in recent weeks. This suggests traders are preparing for a “higher for longer” rate environment, a sharp change from earlier assumptions. For derivatives traders, this may favor 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. Traders may also consider strategies in Treasury futures, such as buying puts, to hedge or to speculate on further yield increases. This is a clear shift from late 2025 sentiment, when the market was pricing in multiple rate cuts for this year. Last year’s consensus assumed inflation would fall much faster than it has. Current data challenges that view and requires more flexible positioning. Create your live VT Markets account and start trading now.

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