The US dollar edged lower on Tuesday ahead of the release of GDP data, as expectations of further monetary easing continued to weigh on both the currency and Treasury yields.
The 10-year yield slipped back, erasing Monday’s gains, reflecting renewed caution among investors.
While markets broadly expect the Federal Reserve to keep rates unchanged at its January meeting, expectations for 2026 remain tilted toward two rate cuts, leaving the dollar vulnerable to downside surprises in macro data.
Today’s GDP release is seen as a key inflection point for these expectations. Any evidence of economic cooling would likely reinforce the dovish narrative, dragging yields lower and adding pressure on the greenback. This sensitivity could be amplified by thinning year-end liquidity and by recent global monetary policy shifts. In particular, the Bank of Japan’s latest rate hike could encourage capital inflows into the yen, further weighing on the dollar if US data disappoints.
Comments from Federal Reserve officials have added to the cautious tone. Fed Governor Stephen Miran warned that a recession could emerge unless rate cuts extend into 2026. In contrast, Cleveland Fed President Beth Hammack reiterated her scepticism toward further cuts. This internal divergence highlights how pivotal incoming growth data has become. With policy uncertainty elevated and liquidity conditions fragile, today’s GDP print could prove decisive in shaping near-term direction for both the dollar and yields.
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