The US Dollar (USD) is bouncing back thanks to reduced global trade tensions and expectations that the Federal Reserve will keep interest rates steady. New trade deals, particularly between the US and EU, are boosting the USD as the August 1 tariff deadline approaches, making the market cautious. The US Dollar Index (DXY), which measures the USD against six major currencies, has risen for three consecutive days, reaching about 98.60—the highest level in a week. The recent US-EU trade deal includes a 15% tariff on certain EU imports but provides exemptions in key sectors. Additionally, the EU has committed to purchasing $250 billion worth of US liquefied natural gas annually.

EU-US Energy Investment

The EU has also pledged $600 billion to invest in the US, focusing on clean energy and other vital areas. While existing tariffs on steel and aluminum continue, a quota-based system may be introduced later. Discussions between US and UK leaders echoed similar views, with tariffs remaining unchanged for the UK. Oil prices are rising due to geopolitical tensions, making the economic situation more complex. However, trade developments are bringing optimism, as reflected by S&P 500 futures rising 0.4%. Caution still exists as we await the Federal Reserve’s decision on interest rates. The current recovery of the dollar signals important trends for the upcoming weeks, especially with the US Dollar Index staying strong above 105. This scenario suggests that traders should position themselves for continued dollar strength against other major currencies.

Monetary Strategy and Dollar Strength

Recent data shows strong job growth, with over 272,000 jobs added in May and inflation steady at around 3.3%. This supports the idea that the central bank will remain steady. The CME FedWatch Tool indicates that there is over a 90% chance that interest rates will stay the same soon. This certainty encourages strategies that benefit from low volatility and a strong dollar. While optimism from trade is present, we must also be cautious, as indicated by the Volatility Index (VIX) staying in the low teens. Buying call options on the dollar can offer a way to take advantage of its potential upside while keeping risks defined. This allows for a flexible response to positive market feelings without overcommitting. Historically, times when central banks keep rates high to tackle inflation lead to lasting currency strength. We believe that selling out-of-the-money put options on the dollar could be an effective strategy, generating income from the premium collected and benefiting if the dollar remains stable or gets stronger. High oil prices, with WTI crude recently trading above $80 a barrel, further strengthen the case against quick rate cuts. This inflationary pressure suggests that the central bank is likely to hold its current stance, which is beneficial for the currency. The announced energy purchase commitments will also maintain consistent demand for the dollar. Create your live VT Markets account and start trading now.

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