Brown Brothers Harriman’s Elias Haddad (BBH) notes that interest rate differentials are keeping the US Dollar Index (DXY) in a 96.00–100.00 range, even as recent ceasefire optimism faded on compliance doubts. Haddad maintains a structurally bearish US Dollar (USD) view, expecting only one 25 bps Federal Reserve (Fed) cut by year-end as February US Personal Consumption Expenditures Price Index (PCE) data are unlikely to alter rate expectations.

DXY capped by rate differentials

"Brent crude oil prices are up 8% after dropping to near a one month low at $90.40 a barrel yesterday. The equity and bond market rally stalled, while the DXY (USD index) rebounded following a test of its 200-day moving average yesterday."

"Bottom line: interest rate differentials between the US and other major economies still anchors the DXY index within a 96.00-100.00 range. Structurally, we maintain our long-held bearish USD view because of fading confidence in US trade and security policy, worsening US fiscal credibility, and the ongoing politicization of the Fed."

"Today, the February PCE will capture the pre-shock US inflation and consumer spending backdrop (1:30pm London, 8:30am New York). As such, the data is unlikely to shift the dial on Fed funds rate expectations, which currently implies nearly even odds of a 25bps cut over the next twelve months."

"Headline PCE is seen at 2.8% y/y for a second straight month, core PCE is expected to dip 0.1pts to 3.0% y/y, and real personal spending is forecast to rise by 0.2% m/m vs. 0.1% in January. For reference, at its March 17-18 meeting, the FOMC’s median 2026 projection for both headline and core PCE stood at 2.7%."

"The FOMC March 17-18 meeting minutes underscored the two-sided policy risks from a protracted conflict in the Middle East. “Most” participants raised the concern that a lengthy war could warrant additional rate cuts to support the labor market, while “many” would favor rate increases to help bring inflation down to the 2% target. Provided the energy shock continues to fade, we expect the Fed to deliver one 25bps cut by year-end, in line with the FOMC’s projection."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)