The US Dollar started the week under pressure, losing ground to major currencies on Monday. However, on Tuesday, it stabilized as the market awaited news from President Trump and Fed Chairman Powell. **Currency Changes** The USD struggled most against the Euro, dropping 0.50%, while it faced mixed results with other key currencies. The USD Index decreased by over 0.6% on Monday, falling to around 98.00 early Tuesday.

Fed Chairman Powell Controversy

Late Monday, reports surfaced about a legal referral against Fed Chairman Powell for alleged perjury. Treasury Secretary Bessent criticized the Fed’s handling of tariffs, arguing there were no inflation signals. Meanwhile, the Richmond Fed Manufacturing Index was scheduled for discussion. The EUR/USD pair slightly consolidated below 1.1700, while the European Central Bank was set to release the Bank Lending Survey. The Reserve Bank of Australia’s minutes hinted at potential future rate cuts, negatively impacting the AUD/USD rate. In trade news, Japan and the US were discussing mutually beneficial agreements. Gold prices soared over 1%, reaching a one-month high before a technical correction brought it back to $3,380. The Federal Reserve’s actions, particularly QE and QT, are essential in influencing economic conditions and the USD value.

Strategy Amidst Uncertainty

The tension between the administration and Fed Chairman Powell creates uncertainty for the US Dollar. Traders in derivatives should brace for more volatility instead of betting on a clear trend in the weeks ahead. This environment favors strategies that profit from price fluctuations. Evidence from the market supports this outlook; the CBOE Volatility Index (VIX) showed spikes around recent Federal Reserve announcements. It is currently near 15, which is significantly higher than its yearly lows. This indicates that the market is reacting to the political pressures pointed out by Mr. Bessent. We expect this sensitivity to continue as traders monitor any new developments involving Mr. Powell. Given the unpredictable nature of the situation, we suggest using options to manage risk. Buying straddles or strangles on the US Dollar Index can help traders benefit from a big price move in either direction. This strategy eliminates the need to predict the outcomes of political maneuvers accurately. Historically, periods of tension between the White House and the Federal Reserve, like in the 1970s, led to fluctuating monetary policies and currency instability. This suggests that current conflicts may lead to significant adjustments. We are preparing for a similar phase of instability. For the EUR/USD pair, opportunities exist, but caution is advised. The latest ECB Bank Lending Survey showed tighter credit standards for businesses. While the Euro has gained strength, this data indicates that its rally could be fragile. Using call options on the pair can help capture potential upside while limiting potential losses. The rise in gold prices signals a flight to safety, with recent prices topping $2,400 per ounce amid concerns over monetary policy tools like quantitative easing. We expect this trend to continue as long as the dollar’s direction remains uncertain. Traders should consider buying call options on gold futures to benefit from further price increases. The Reserve Bank of Australia’s minutes suggest clearer trading direction. The RBA held rates steady at 4.35% in its latest meeting but maintained a cautious tone. As a result, the Australian dollar may weaken further against the US Dollar if US data surprises positively. We see potential in strategies that bet against the AUD/USD. Create your live VT Markets account and start trading now.

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