The US Dollar Index has risen back above 99.00 after a brief drop to 98.60. This marks its best weekly performance of the year, largely due to declines in the Euro and Yen. Market attention is focused on upcoming speeches from Fed officials Jerome Powell and Michelle Bowman at a banking event. The Dollar’s rise has been aided by political events in France and Japan that have affected the Euro and Yen.

Impact of Foreign Politics

The unexpected resignation of French Prime Minister Sebastién Lecornu put pressure on the Euro. In Japan, expectations of increased government spending have weakened the Yen. These developments have overshadowed US worries about a possible government shutdown and the prospect of Fed interest rate cuts. The Federal Reserve adjusts interest rates to manage inflation and employment, which affects the US Dollar. They hold eight policy meetings each year to decide on these adjustments. Quantitative Easing (QE) involves the Fed buying bonds to pump money into the economy, which can weaken the Dollar. On the other hand, Quantitative Tightening (QT) occurs when the Fed stops buying bonds, generally strengthening the Dollar. These policies are crucial for maintaining economic stability and controlling inflation. With the US Dollar Index back above 99.00, we anticipate the dollar will trend higher in the coming weeks. This strength reflects not only the US economy but also significant weaknesses in the Euro and Yen. Traders should position themselves to benefit from this difference in monetary policy.

Trading Opportunities

The Federal Reserve’s stance is critical, and any hints of change in tone during upcoming speeches will be closely watched. The latest September 2025 inflation data indicates that Core CPI remains high at 2.8%, while the Fed Funds Rate is steady at 4.00%. This suggests the Fed has little motivation to pursue aggressive rate cuts. We see the aggressive rate hikes from 2022-2023 as a key reason why the Fed will be slow to ease now. In Europe, political instability in France is adding pressure on the Euro. The European Central Bank has a policy rate of 3.50%, and recent quarterly GDP figures for the Eurozone show sluggish growth of just 0.2%. This increases the likelihood that the ECB might cut rates before the Fed does. Therefore, we believe trades favoring a lower EUR/USD exchange rate, like buying put options, are well-positioned. The situation with the Japanese Yen is even more pronounced, presenting a clear chance in the USD/JPY pair. The interest rate gap between the US (4.00%) and Japan (0.10%) is significant. Discussions about a return to Abenomics-style fiscal expansion and loose monetary policy suggest this gap won’t close soon. For derivative traders, this environment favors long positions in the US dollar. We see value in buying call options on dollar-tracking ETFs like UUP or USD/JPY futures to capitalize on expected gains while managing risk. The VIX Index, which measures market volatility, has been rising from its lows earlier in the year and is currently around 17, indicating that options premiums are becoming more sensitive to news events. However, speeches from Fed officials present a significant risk that could lead to sharp price fluctuations. Traders should stay flexible and consider strategies that could profit from large movements in either direction, such as using options straddles on major currency pairs around the time of the scheduled speeches. Create your live VT Markets account and start trading now.

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