The US Dollar ended the week higher after a stronger-than-expected nonfarm payrolls report. It gained the most against the Australian Dollar and the Norwegian Krone. Attention then shifted to the January US Consumer Price Index (CPI) report. After the payrolls release, the Dollar did not build on its early gains.

Fed Policy And Inflation Outlook

The report said January CPI could shape market expectations for the Federal Reserve’s next move. It noted that a softer CPI reading could signal that core inflation is still easing. The article also listed reasons the Fed could still cut rates later this year. These included stronger productivity growth, smaller pass-through from earlier tariff hikes, and slower wage growth and inflation. It added that rolling back some tariff increases could lower inflation pressure. That, in turn, could give the Fed more room to cut rates, which would likely weigh on the US Dollar. In early 2025, the Dollar strengthened on a solid labor market, even as markets expected Fed rate cuts. The main view was that falling inflation would weaken the Dollar over the year. That largely played out, as the Fed began cutting rates in the second half of 2025.

Derivative Trading And Volatility

Now, as we move through February 2026, the backdrop has changed. Last month’s jobs report showed the labor market remains firm, with 195,000 jobs added versus expectations of 170,000. More importantly, this week’s January CPI report showed core inflation steady at 2.8%, which makes the Fed’s next steps less clear. This points to more upside for the Dollar as markets reduce expectations for further rate cuts this year. Derivatives traders may want to consider short-term positions that benefit from a stronger Dollar. For now, the easiest path for the US Dollar looks higher, unless inflation or labor data weakens clearly. Uncertainty about the Fed’s next move is also pushing implied volatility higher. The CVOL index for major currency pairs has risen from 6.5 to 7.8 over the past month. That makes option strategies such as long straddles or strangles on pairs like EUR/USD more attractive, as they are designed to benefit from large moves in either direction. It may also be wise to hedge against renewed Dollar strength. It also makes sense to focus on the Dollar against currencies backed by more dovish central banks, such as the Australian Dollar. The Reserve Bank of Australia is signaling more willingness to cut rates than the Fed is right now. That makes call options on USD/AUD, or put options on AUD/USD, relevant strategies for the weeks ahead. The disinflationary lift expected from tariff rollbacks in 2025 did not fully arrive, leaving inflation stickier than forecast. That history supports today’s view that the Fed may keep rates unchanged for longer than markets expected late last year. As a result, positioning for a period of continued Dollar strength is a reasonable approach. Create your live VT Markets account and start trading now.

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