The US Dollar Index (DXY) is under pressure as it starts the week trading below the 98.00 level. Geopolitical tensions have recently emerged due to tariff threats from the US directed at the EU and Mexico, alongside worries about Federal Reserve Chair Jerome Powell’s role. On Tuesday, the June Consumer Price Index (CPI) will be released, providing a fresh update on US inflation. This could affect expectations about Federal Reserve policies and the DXY’s direction. As the second-quarter earnings season kicks off, major US financial institutions will report their results, offering insights into the health of the US financial system.

Technical Indicators of the Dollar

Although the DXY has slightly recovered from 96.38, it remains below the 98.00 resistance level. The 20-day simple moving average (SMA) is at 97.70, and the 50-day SMA is at 98.84, both acting as barriers. These averages trending downward suggest a bearish outlook for the Dollar. The RSI is neutral at 49, indicating the Dollar lacks momentum for a positive shift. The US Dollar is widely traded, making up more than 88% of foreign exchange transactions, with its value largely influenced by Federal Reserve policies. Previous interest rate changes and measures such as quantitative easing (QE) have impacted the Dollar’s strength. Given this situation, the next few weeks are crucial for positioning against the Dollar. The indicators point to a bearish trend, with moving averages suggesting further decline. The market is closely watching for the timing of the first rate cut by the central bank, which often signals Dollar weakness. Looking back to the easing cycles that began in 2001 and 2007, the DXY experienced significant falls as the market anticipated lower interest rate differences compared to other major currencies. We expect a similar scenario to emerge.

Strategizing Against Dollar Decline

Our strategy should focus on building positions that benefit from a falling Dollar. The latest CPI showed a year-over-year increase of 3.3% for May, which was lower than many expected and strengthens the case for an earlier policy shift. This isn’t mere guesswork; the derivatives market reflects this sentiment. The CME FedWatch Tool indicates a greater than 65% chance of a rate cut by the September meeting. This outlook supports strategies to short the Dollar. For derivative traders, this means considering long put options on Dollar-tracking ETFs like the Invesco DB US Dollar Index Bullish Fund (UUP). This approach allows for a defined risk while profiting from a potential decline in the index. The neutral RSI reading suggests that a rebound is less likely, making bearish positions easier to enter. At the same time, we are exploring call options on currencies that typically rise when the Dollar falls. The Euro and commodity-based currencies are strong candidates in this scenario. The beginning of earnings season adds another layer of complexity that options can help navigate. If major financial institutions report a sharper-than-expected economic slowdown, it could pressure Powell to take action, further pushing the Dollar down. We can use weekly options to trade around these earnings announcements and the next CPI release, leveraging expected spikes in volatility while maintaining a bearish view on the Dollar for the medium term. Create your live VT Markets account and start trading now.

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