The Dollar Index is moving sideways today after gaining more than 1% yesterday, settling near the 105.1-point level.
The dollar’s cautious movements today come with the uncertainty caused by yesterday’s inflation data, which shook the markets’ hypothesis about the start of interest rate cuts in June, in addition to the anticipation regarding what may happen in the Middle East in the coming days with escalating warnings.
Also, it was not only bond yields that rose naturally yesterday in response to this shift in expectations, but rather the uncertainty in the fixed income market rose significantly as well.
The ICE BofAML U.S. Bond Market Option Volatility Estimate Index (MOVE) index, which measures the level of fear in the Treasury market, saw its largest daily gain since the beginning of the year at 11% yesterday and reached its highest level in more than a month.
Meanwhile, the sudden acceleration of inflation to in March led to the lowest levels of hope since February about the possibility of reducing the interest rate in June by 25 points. According to the CME FedWatch Tool, this probability has fallen to just 16% from more than 50% before the inflation data was announced.
In addition to all of this, the markets are closely monitoring what is happening in the Middle East, with military actions escalating day after day, even on the first holyday of Eid al-Fitr, which has ignited fears about the possibility of expanding the current fronts, bringing the entire region into a state of total chaos that cannot can be controlled. This, in turn, may encourage the US dollar to maintain its high levels as a safe haven currency.
While we see some hope about the possibility of reaching a temporary calm agreement in Gaza, there still appears to be a latent intention to prepare for large-scale ground military action in Rafah, with no desire to end the war or even push more actors in the region to the front.
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