The US Dollar has gained strength following a deal about Greenland that removed planned EU tariffs. Risk assets also increased, but markets are waiting for more information before fully changing their focus. President Trump will let officials like JD Vance and Marco Rubio handle further negotiations. The Federal Reserve’s meeting on January 28 may shift attention back to economic factors, especially with lower unemployment rates and a Department of Justice investigation into Jerome Powell, which could lead to a more hawkish approach.

Jerome Powell’s Response to Investigation

Jerome Powell’s response to the investigation indicates potential upside for the dollar, as he may adopt a more hawkish tone in future meetings to show independence. While there are some risks for the dollar, like fluctuations in Japanese Government Bonds (JGBs) that may influence Treasuries and concerns about upcoming US tech earnings, the current economic climate is favorable for the US dollar in the near term. We remember the dollar’s rally in early 2025 after the Greenland deal led to the removal of EU tariffs. Present high-level trade talks about critical minerals are fostering a similar mix of uncertainty and opportunity. In the week after last year’s Greenland announcement, the Dollar Index (DXY) rose over 1.2%. We are closely monitoring this situation. The events surrounding the Federal Reserve last year also provide insights for the upcoming meeting on January 28. After the investigation into its leadership in 2025, the Fed took a more hawkish stance to assert its independence. With December’s core inflation data showing an unexpected rise to 2.8%, the Fed is likely to maintain a strong position, which could support the dollar.

Positioning for Potential Dollar Strength

This points to the possibility of dollar strength, suggesting traders consider call options on the USD, especially against currencies with more dovish central banks. Implied volatility in major currency pairs surged around the 2025 Greenland news, so acquiring options now could be wise ahead of a similar increase. We are particularly interested in USD/JPY call options, as any further JGB fluctuations could enhance the dollar’s appeal as a safe haven. However, there are ongoing risks, much like last year when tech earnings were under scrutiny. We see a similar scenario now, with major tech companies set to report next week amidst worries about slowing global growth. Traders with long positions in the dollar should think about hedging with protective puts on tech-heavy indices such as the Nasdaq 100. Create your live VT Markets account and start trading now.

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