Risk-on sentiment dominated as the S&P 500 hit record highs at 6,173, while gold slipped 1.65% to $3,273.67/oz, signaling reduced crisis hedging flows. The dollar failed to attract defensive flows, redirecting capital into higher-yielding equities and technology sectors, weakening its support.
Mixed PCE Data Sparks Stagflation Worries
Friday’s economic data showed core PCE rising 0.2% m/m (2.7% y/y), above expectations, while personal income fell 0.4% and spending slipped 0.1%. Markets interpreted these numbers as evidence of tariff-induced stagflation rather than healthy demand-driven inflation.
Despite an improved University of Michigan sentiment reading at 60.7, the decline in income and spending underlined economic fragility, limiting the dollar’s ability to rally on inflation signals.
Federal Reserve Pivot Shifts Yield Outlook
Fed Vice Chair Bowman’s dovish comments on June 23 and Chair Powell’s testimony on June 25 opened the door to policy easing, lifting July rate cut odds to 25% and year-end cuts to 65 basis points.
This dovish tilt reduced the dollar’s carry advantage despite stable Treasury yields (10-year at 4.39%, 2-year at 3.3%, 30-year at 4.85%). The bull steepening in Treasuries and reduced Fed funds expectations weakened traditional dollar-yield support, further pressuring the DXY.
Euro and Yen Strength Fuel Dollar Breakdowns
EUR/USD surged to 1.1754 as the ECB signaled nearing the end of its rate-cut cycle, while USD/JPY dropped to 143.749, reflecting yen strength from safe-haven flows. The DXY traded below its 50-week and 100-week SMAs, breaking support levels with no bullish reaction, reinforcing market conviction toward a bearish dollar outlook.