The dominant narrative this week was not that the Federal Reserve became less hawkish—it was that markets became less convinced the Fed would need to become even more hawkish. Early in the week, investors aggressively priced in additional rate hikes after the June FOMC meeting, encouraged by a string of increasingly hawkish forecasts from major investment banks. By the end of the week, however, those expectations had cooled as inflation data largely met forecasts and the collapse in oil prices eased concerns over another wave of energy-driven inflation.
The shift was significant. Deutsche Bank’s call for two rate hikes this year, followed by Bank of America’s even more aggressive forecast for hikes in September, October and December, initially sent the Dollar soaring and pushed Dollar Index through a major long-term Fibonacci resistance. Gold briefly broke below the key $4,000 psychological level as markets positioned for a more forceful Fed response. But May’s PCE report failed to deliver the upside inflation surprise needed to justify those extreme scenarios, while the continued plunge in crude oil prices following the US-Iran ceasefire materially improved the near-term inflation outlook. By week’s end, markets had largely converged back toward a base case of one Fed hike before year-end.
What stood out most, however, was the Dollar’s resilience. Treasury yields retreated, expectations for multiple rate hikes faded, and yet the Greenback held onto almost all of its gains to finish comfortably as the week’s strongest major currency. That suggests investors are viewing the Dollar’s advance as a broader trend rather than simply a reaction to changing Fed expectations. Attention now turns to next week’s US employment report, which could quickly revive speculation of a more aggressive Fed if labor market strength persists. For the week, Dollar topped the currency rankings, followed by Loonie and Sterling, while New Zealand Dollar and Aussie were under the heaviest pressure.
Fed Panic Cools as Oil Collapse Restores Inflation Confidence
The sharp repricing in Fed expectations this week reflected a market that briefly feared policymakers might have to respond far more aggressively to persistent inflation. Following last week’s FOMC meeting, Deutsche Bank forecast two rate hikes this year—in September and December—while Bank of America went even further, calling for increases in September, October and December. Those forecasts amplified concerns that inflation could remain stubbornly high well into 2027, pushing Treasury yields higher and driving Dollar Index through a key long-term Fibonacci resistance.
By the second half of the week, however, that narrative began to lose momentum. May’s PCE report confirmed that headline inflation accelerated from 3.8 to 4.1, while core PCE edged up from 3.3 to 3.4. But because both readings matched expectations, investors were left without the upside surprise needed to justify pricing an even more aggressive Fed. The immediate result was an unwinding of some of the week’s most extreme tightening bets, with markets shifting back toward a more conventional base case of one rate hike before year-end. Expectations for a September move eased to around 60, while the probability of two hikes this year fell back to roughly one-third.
The other major driver was the continued collapse in oil prices. Following the US-Iran ceasefire agreement and the subsequent easing of sanctions, WTI crude extended its decline to finish the week near $70 a barrel, effectively returning to pre-war levels. That dramatically improves the near-term inflation outlook, as lower energy prices are likely to exert meaningful downward pressure on headline CPI and PCE over the next two months. While underlying inflation remains uncomfortably high and the Fed is unlikely to declare victory anytime soon, the retreat in oil prices has given policymakers valuable breathing room. Unless incoming data begin to surprise to the upside again, markets appear comfortable settling around a single Fed hike as the most likely outcome for 2026.
Dollar Rally Slows, But Bullish Momentum Remains Intact
Although the repricing of Fed expectations slowed the Dollar’s advance toward the end of the week, it did little to undermine the broader bullish picture. Ordinarily, a retreat in Treasury yields, easing expectations for multiple rate hikes and collapsing oil prices would have prompted a much deeper correction in the Greenback. Instead, Dollar merely consolidated after a powerful rally, suggesting that bullish sentiment remains firmly in place.
That resilience points to a market convinced that the Dollar’s recovery is not solely dependent on expectations for more aggressive Fed tightening. Even if the base case has shifted back to one rate hike this year, US interest rates are still expected to remain among the highest in the developed world, while the economy continues to outperform many of its major peers. At the same time, lingering uncertainty surrounding global growth and volatile equity markets continue to underpin demand for the Greenback whenever risk appetite deteriorates.
The focus now shifts to two developments that could determine whether Dollar resumes its advance. First is next week’s June non-farm payrolls report. Another stronger-than-expected employment reading would likely revive speculation that the Fed may ultimately need to deliver more than one rate hike this year, reinforcing the recent Dollar breakout. The second is the technology sector. Despite this week’s volatility, NASDAQ continues to trade above the 25,000 level, suggesting there has been no broad capitulation. However, a renewed wave of tech liquidation would almost certainly fuel another bout of risk aversion, providing an additional tailwind for the Dollar regardless of whether Fed expectations become more hawkish again.
Dollar Index Breakout Signals Long-Term Trend Reversal
Technically, Dollar Index delivered one of its most important bullish signals in months by breaking decisively above 38.2 retracement of 110.17 to 95.55 at 101.13. The move suggests that the rebound from this year’s 95.55 low is no longer merely a corrective bounce, but may already be reversing the broader downtrend that began from the 2025 peak. As long as former resistance at 100.31 now acts as support, the near-term outlook remains firmly tilted to the upside.
The next objective comes in at 100 projection of 95.55 to 100.64 from 97.62 at 102.71. Reaching that level appears achievable if incoming US data continue to support expectations for at least one additional Fed rate hike this year. However, a decisive break above 102.71 would likely require markets to once again price a more aggressive tightening path, such as two rate hikes before year-end. Without that shift in expectations, Dollar Index could instead encounter stronger resistance and enter a period of consolidation after its recent sharp advance.
The longer-term charts paint an even more constructive picture for Dollar bulls. On the monthly timeframe, Dollar Index has reclaimed its 55 M EMA (now at 100.67), after finding support at the lower boundary of the rising channel that has guided price action since the 2008 low at 70.69. That combination often marks the beginning of a new medium- to long-term advance rather than simply another countertrend rally. While it is still too early to declare a full secular uptrend has resumed, sustained trading above the 55 M EMA would increasingly support the case for an eventual retest of the 2022 high at 114.77 at least. For now, that remains the longer-term scenario worth monitoring as the Dollar’s technical backdrop continues to improve.
Treasury Yields Diverge as Inflation Fears Ease
US Treasury yields ended the week with a split personality. The policy-sensitive 2-year yield retreated from Monday’s high above 4.23 to close around 4.09 as markets pared back expectations for multiple Fed rate hikes. Nevertheless, the broader technical picture remains bullish. As long as 4.01 support holds, the rise from this year’s 3.36 low is still favored to extend toward 100 projection of 3.36 to 4.02 from 3.67 at 4.34. Even so, bearish divergence on the daily MACD suggests upside momentum is beginning to fade, raising the prospect of a period of range trading after hitting 4.34. rather than another sustained surge.
For Dollar bulls, the implication is straightforward. Dollar Index and the 2-year yield have been moving broadly in tandem throughout the recent rally, reflecting shifting expectations for Federal Reserve policy. Both have now reached important technical milestones. Extending the Dollar’s breakout above 102.71 and lifting the 2-year yield toward or beyond 4.34 would probably require markets to move back toward pricing more than one Fed rate hike before year-end. Without that catalyst, both assets may spend time consolidating recent gains.
The 10-year yield tells a different story. Its break below the 38.2 retracement of 3.96 to 4.69 at 4.41 suggests the advance from 3.96 has already completed at 4.69. Deeper decline toward 61.8 retracement at 4.24 is now favored while 4.51 caps. Unlike the decline in the 2-year yield, which reflects less aggressive Fed pricing, the fall in the 10-year yield appears to be driven primarily by improving inflation expectations as oil prices return to pre-conflict levels.
Equally important, equities have remained relatively resilient despite lower long-term yields, indicating that investors are not rushing into Treasuries for safety. Instead, the bond market is pricing a scenario in which inflation gradually cools while the Fed retains sufficient credibility to keep longer-term price expectations anchored—a backdrop that may temper, but not necessarily reverse, the Dollar’s broader uptrend.
NASDAQ Holds Key Support, Leaving Dollar With One More Headwind
NASDAQ endured another volatile week as investors continued to reassess lofty AI-related valuations and the prospect of higher US interest rates. Despite the sharp swings, however, the technical damage remains limited. The index is still holding comfortably above 38.2% retracement of 20,690 to 27,190 at 24,707, suggesting that the price action from the record high is, for now, best viewed as a correction within the broader uptrend rather than the start of a larger reversal.
The price structure also hints that the correction could be entering its later stages. If the pullback from 27,190 completes as a three-wave consolidation above 24,707, NASDAQ would be well positioned to resume its long-term advance and eventually break to fresh record highs. Such a recovery would likely encourage investors to rotate back into growth assets, reducing demand for the Dollar as a defensive holding while easing concerns that tighter Fed policy will significantly derail corporate earnings.
The bullish scenario, however, depends on 24,707 holding firm. A decisive break below that support would suggest the entire advance from 20,690 is reversing rather than merely consolidating, exposing 61.8% retracement at 23,173 and potentially even deeper losses. That would almost certainly reignite broad risk aversion, providing fresh support for the Dollar regardless of whether Fed expectations become more hawkish. In that sense, NASDAQ may prove just as important as next week’s US non-farm payrolls report in determining whether the Dollar resumes its rally or extends the current consolidation into July.
Looking Ahead: July Holds the Key
Markets have stepped back from the aggressive Fed scenarios that briefly dominated sentiment earlier in the week. With May’s PCE inflation report delivering no upside surprise and oil prices collapsing back to pre-war levels, investors have largely converged on a base case of one Fed rate hike before year-end. Yet the Dollar’s ability to retain almost all of its gains despite that repricing sends an important message: the Greenback’s recovery is being supported by a broader improvement in both macro fundamentals and technical momentum, rather than simply by ever-more hawkish Fed expectations.
The focus now shifts to July, where the next phase of the Dollar’s rally—or consolidation—will likely be determined. A stronger-than-expected June non-farm payrolls report could quickly revive speculation that the Fed will need to tighten more aggressively, while renewed weakness in technology stocks would provide an additional boost through the risk-aversion channel. On the other hand, softer labor market data and a stabilization in equities could keep Dollar Index consolidating after its recent breakout. Even so, with Dollar Index holding above a major long-term Fibonacci resistance, Treasury yields remaining elevated by historical standards, and the broader technical picture continuing to improve, the path of least resistance still appears to favor further Dollar strength into the second half of the year.
USD/CAD Weekly Outlook
USD/CAD rose further to 1.4247 last week but retreated mildly since then. Initial bias remains neutral this week for consolidations. While deeper pullback cannot be ruled out, downside should be contained above 1.3965 resistance turned support. Above 1.4247 will resume the rally from 1.3480 to 61.8% retracement of 1.4791 to 1.3480 at 1.4290. Firm break there will pave the way back to 1.4791 high.
In the bigger picture, current development suggests that fall from 1.4791 has completed as a three wave correction to 1.3480. It’s still early to judge if rise from there a corrective bounce, or resumption of the larger up trend from 1.2005 (2021 low). But in either case, retest of 1.4791 high should be seen next.
In the long term picture, rising 55 M EMA (now at 1.3588) remains intact. Thus, up trend from 0.9056 (2007 low) could still be in progress. However, considering bearish divergence condition M MACD, sustained trading below 55 M EMA will argue that the up trend has completed with five waves up to 1.4791, and turn medium term outlook bearish for correction to 38.2% retracement of 0.9056 to 1.4791 at 1.2600.
