The US Dollar is facing challenges as stock markets rise. This uptick is linked to discussions among Federal Reserve officials about a more relaxed policy, even as the global economy remains strong. Analysts believe that differences in interest rates might weaken the USD further. After Federal Reserve officials hinted at an economic slowdown, the chance of rate cuts has increased. Key figures are worried about the job market and are talking about possible changes to policy soon. People expect the Fed to adjust rates in the future. Fed funds futures now nearly guarantee a 25 basis point cut at the next meeting. By year’s end, predictions show a total of 50 basis points in cuts and a 40% chance of another 25 basis point decrease. Next week, we’ll see US Q2 non-farm productivity data, predicted to be at 2.0% SAAR, which is an improvement from the previous quarter’s -1.5%. If productivity increases without causing price hikes, it could help the USD. We’ll also look closely at the New York Fed’s July inflation expectations survey. If inflation expectations remain low, the Fed might choose to ease its policy. With rising expectations for rate cuts by the Federal Reserve, we are preparing for further USD weakness. A smart move is to use options on currency ETFs, like buying call options on the Invesco CurrencyShares Euro Trust (FXE), to benefit from a stronger Euro against the Dollar. We previously saw a similar trend in late 2023 when the Dollar Index (DXY) dropped from over 106 to around 101 in two months, as the market anticipated rate cuts for 2024. We should also consider interest rate expectations. With futures now suggesting a strong probability of a 25 basis point cut in September 2025, investing in derivatives related to short-term government debt makes sense. For example, futures contracts on the 2-year US Treasury note are likely to gain value as yields decrease. The dovish Fed stance is helping stock markets. The S&P 500 index has already risen over 4% in the last month, surpassing 5,500. Buying call options on broad market indices like the SPDR S&P 500 ETF (SPY) is a smart way to take advantage of this upside in the coming weeks. We need to pay attention to upcoming economic data for potential surprises. The Q2 productivity report and the New York Fed’s inflation survey could lead to short-term fluctuations if the results are better than expected. To manage risks, using option spreads, such as bull call spreads instead of outright long calls, can limit both profits and losses. Finally, a supportive Fed typically reduces market fear, reflected in lower volatility. The CBOE Volatility Index (VIX) has fallen to around 13.5, down from recent highs above 16 in the past two months. We see an opportunity to sell VIX call options or use other derivatives to bet on lower volatility as the Fed’s direction becomes more certain.

here to set up a live account on VT Markets now