Fed Rate Bets Remain Anchored to Terminal Levels

Market pricing for Fed rate cuts has recalibrated sharply over the past week as inflation signals and labour data remain sticky above consensus expectations. Traders are now pricing in a median of two cuts by year-end, down materially from the four-cut expectation priced three months ago. This repricing has lifted the federal funds futures curve at the short end, anchoring real rates at levels that support a stronger dollar and penalise non-yielding assets like Bitcoin and Ethereum.

The 2-year yield has stabilised around the 4.5% level, with the 10-year hovering near 4.2%. These rates reflect a "higher for longer" consensus that has proven sticky despite soft labour market signals earlier in the quarter. As long as inflation data prints hotter than expectations or Fed speakers lean hawkish, the terminal rate assumption shifts upward, which directly compresses crypto demand.

DXY Strength Extends into US Trading Hours

The US dollar index has traded with a bid bias as US desks position through the New York session, with the index holding above the 104.50 level. This strength reflects capital flowing back into dollar-denominated fixed income as real rates attract carry trades back into USD pairs. Safe-haven momentum has also picked up on geopolitical risk and uncertainty around Q4 earnings guidance.

DXY persistence at these levels is the primary headwind for risk assets. Bitcoin has historically struggled during periods of DXY outperformance, particularly when the dollar rally is driven by rising real rates rather than safe-haven demand alone. Ethereum has shown even greater sensitivity to dollar strength, with on-chain data showing reduced USD-denominated trading volume during high DXY regimes.

The spread between the DXY and crypto market cap has widened this week, signalling that capital rotation away from crypto into dollar strength remains intact. This is not a temporary dislocation but reflects structural positioning by macro funds repositioning for higher interest rates.

Yield Curve Flattening and Liquidity Concerns