The US Gross Domestic Product (GDP) grew at an annual rate of 3% in Q2, beating the expectations of 2.4%. This followed a contraction of 0.5% in Q1. The Core Personal Consumption Expenditures Price Index rose by 2.5%, a bit above the forecast of 2.4%. Meanwhile, the GDP Price Index increased by 2%, down from 3.8% in Q1. This growth in GDP mainly resulted from lower imports and stronger consumer spending, although there were small declines in investment and exports. The US Dollar gained strength because of this news, with the USD Index reaching its highest level in five weeks at 99.25, increasing by 0.35% for the day. Predictions had suggested a 2.5% growth rate for Q2, and the strong GDP data could lead to further strengthening of the US Dollar. These GDP numbers will likely impact the Federal Reserve’s decision on interest rates, with a potential rate cut expected in September. The performance of the US Dollar is uncertain, but a strong GDP along with a hawkish Federal Reserve could help its recovery. Current technical indicators show that a breach of mid-July highs is needed to confirm a trend reversal, possibly reaching the 100.00 mark. This morning’s report puts us in a complicated position. The surprising 3% GDP growth goes against market expectations for a Federal Reserve rate cut in September. This clash between strong economic data and hopes for a dovish policy may create trading opportunities in the coming weeks. The market is already responding to this new situation. According to the CME FedWatch Tool, the likelihood of a rate cut in September has dropped from over 70% last week to just under 50% since the GDP announcement. This significant change means traders should be cautious about assuming a rate cut is imminent. Now, all attention is on the upcoming July jobs report. We believe that a strong payroll number, especially over 200,000, would further reduce the chances of a rate cut and could drive the US Dollar higher. Options strategies betting on increased volatility in interest rate futures might be wise, since the report is likely to trigger significant movement. The mixed signals—strong growth but a cooling GDP Price Index—are creating tension in the bond market. We’ve observed the MOVE Index, which measures bond market volatility, increase to 88 from a low of 75 last month. This indicates that traders are focusing on hedging against sudden shifts in interest rates. We’ve seen similar situations before. In 2019, the Fed cut rates multiple times even when the economy was stable, citing global risks as the main factor. This suggests that even strong US data may not prevent the Fed from justifying a cut, which could be risky for those betting heavily on a stronger dollar. For now, the US Dollar Index seems to be on an upward trend, but it needs to break through the resistance levels from mid-July to confirm this shift. We think using derivatives like call options on the UUP ETF could be a smart strategy to interact with a potential move toward the 100.00 level. This approach would allow us to benefit from any further dollar recovery while limiting possible losses if the rally does not continue.

here to set up a live account on VT Markets now