The US Dollar and Treasury yields are holding steady above Friday’s lows, and US equity futures are showing a slight recovery. However, concerns linger about the stability of any USD recovery as broader trends continue.

US Policymaking and Economic Concerns

The credibility of US policymaking is being questioned. The upcoming exit of Fed Governor Adriana Kugler, along with Trump’s possible choice of a successor who shares his views and the firing of the Bureau of Labor Statistics head, affects how economic data is perceived. The US economy is facing issues, partly due to tariffs. As of August 1, the average effective US tariff rate has climbed to 18.3%, the highest since 1934, up from 2.4% in January. These tariffs could lower real GDP growth by 0.5 percentage points in 2025 and 2026, and may increase consumer prices by 1.8% in the short term. Considering the current market’s uncertainty, we see the slight increase in US equities as delicate. With the CBOE Volatility Index (VIX) closing last week above 22, a level not consistently observed since late 2024, we expect ongoing volatility. As a result, we prefer strategies that can benefit from this instability, such as buying VIX call options or setting up long strangles on the S&P 500. Doubts about US institutional credibility, particularly concerning the Bureau of Labor Statistics, have changed our approach to economic data. We can no longer rely on official figures as we once did, making the upcoming CPI data release on August 15th especially risky. This uncertainty makes trading options around the announcement more attractive than taking a directional futures position beforehand.

Economic Impact of Rising Tariffs

The sharp rise in tariffs suggests a stagflationary environment with slowed growth and increased prices. Major retailers have already indicated during their recent Q2 earnings calls that they will pass these import costs on to consumers. We’re considering buying put options on consumer discretionary ETFs, expecting a significant slowdown in spending this holiday season. This situation creates a challenge for the Federal Reserve, making the path for interest rates unclear. The Treasury yield curve has flattened recently, with the spread between the 2-year and 10-year notes narrowing to just 15 basis points, reflecting this confusion. This could be a good time to use options on Treasury bond ETFs like TLT, allowing us to capitalize on significant price movements without needing to predict the Fed’s next steps accurately. Fears over policymaking and economic stability are putting pressure on the US Dollar, which has already decreased by 3% since early July 2025 against a range of major currencies. Historically, times of high political uncertainty, like the debt ceiling debates of the early 2010s, have been linked with dollar weakness. We are considering buying call options on safe-haven currencies like the Swiss Franc or Japanese Yen as a hedge. Create your live VT Markets account and start trading now.

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