The dollar is on the rise. EUR/USD has dropped by 0.5% to 1.1580, while USD/JPY increased by 0.5% to 148.60. This change brings EUR/USD close to yesterday’s lows, primarily influenced by the latest US PPI data. At the same time, AUD/USD has fallen to its lowest point in more than three weeks, dipping below 0.6500. This decline is attributed to a weaker Australian labor market report, which caused a further 0.9% drop as European markets opened.

Trump’s Foreign Aid Bill

In US politics, the Senate approved a bill proposed by Trump that will cut foreign aid. The vote was 51 to 48. This decision will lead to an additional $9 billion in spending cuts by the administration. We expect the dollar to be a key focus in the upcoming weeks. Recent US inflation data indicates that the Producer Price Index has risen by 2.2% year-over-year. This suggests ongoing price pressures, giving the Federal Reserve little incentive to lower rates. This situation makes it a good time to consider buying call options on dollar-tracking funds or put options on the Euro to capitalize on this policy difference. The decline in the Australian dollar also presents a clear trading opportunity, especially with the weak domestic data. Australia’s unemployment rate has recently risen to 4.1%, and job creation has fallen short of expectations. As a result, the Reserve Bank of Australia is likely to adopt a more dovish stance compared to the US. We suggest buying put options on AUD/USD as a straightforward way to take advantage of this weakness.

Interest Rate Expectations

The movement in USD/JPY recalls the strong rally from much of 2022, when US rate expectations exceeded those in Japan. Currently, the CME FedWatch tool shows traders expect no imminent rate cuts from the US, meaning the interest rate gap with Japan will likely remain large. This supports maintaining a long position in the pair, perhaps through call spreads to manage costs as USD/JPY approaches multi-decade highs. The Senate’s bill adds further support for the dollar, as the resulting fiscal tightening is naturally dollar-positive. We can expect greater volatility in the currency markets, with bond market volatility measures like the MOVE index already high. Traders should take this into account when pricing options, as premiums may increase. Create your live VT Markets account and start trading now.

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