USD: Inflation risks keep Fed easing constrained – DBS

DBS Group Research economist Eugene Leow highlights that consensus expects US CPI at 2.4% year-on-year and 0.3% month-on-month for February, with investors highly sensitive to upside surprises. He notes that elevated Oil prices and higher 2-year breakevens are limiting space for Federal Reserve easing, even as markets still price fewer than two rate cuts for 2026.

US CPI, Oil and breakevens drive rates

"Consensus and the market expect US CPI to come in at 2.4% YoY (0.3% MoM) in February. Investors will likely be sensitive to upside surprises in CPI in the current macro environment and we suspect that a CPI miss would probably not keep rates down for long."

"Despite the fall in oil prices over the past two trading days amidst hopes that the Iranian conflict may end soon (the IEA is also proposing the release of oil reserves), WTI is still up by over 40% ytd."

"2Y breakevens are also hovering close to 3%, up by 70bps since the start of the year. In so far as oil stays elevated for longer, frontend rates are likely to be buoyant as space for Fed easing gets constrained."

"Ytd, the 2Y breakeven sensitivity every USD 10/bbl increase in oil price is about 26bps. However, the impact unto nominal yields is more nuanced as the Fed has a dual mandate – price stability around 2% and maximum employment."

"Fed easing bets are delayed/reduced but not completely removed (shy of two cuts are priced for 2026). Within the G10, the Fed is now priced to be the most dovish."

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