USD Faces Volatility Risk as Treasury Issuance and CPI Concerns Mount

The US dollar is approaching a critical juncture as multiple market headwinds converge, creating potential volatility across major forex pairs. Rising Treasury issuance is expected to drain liquidity from markets, while firming CPI expectations signal persistent inflationary pressures that could force the Federal Reserve to maintain its hawkish stance. Current volatility indicators suggest markets are underpricing near-term risks, with implied volatility measures sitting near multi-month lows despite mounting uncertainties. The shift in rate expectations has already impacted USD pairs, with traders reassessing the Fed's terminal rate trajectory. Technical analysis shows USD index testing key resistance at 106.50, with a break above potentially targeting 107.20. However, unusual volatility dynamics across rates and FX markets indicate possible sharp reversals ahead. Traders should prepare for increased whipsaws in major pairs like EUR/USD and USD/JPY as liquidity conditions tighten and market positioning adjusts to evolving rate expectations.