The dollar has recently bounced back, partly due to new threats of tariffs from Trump. These threats come ahead of the expected tariffs on August 1, which have not yet impacted US inflation. Still, higher tariffs in the future could complicate how we interpret inflation data. In the last two weeks, the dollar has strengthened, supported by a short squeeze. This situation might have improved further if Trump hadn’t put pressure on the Federal Reserve, alongside the dovish views from Waller and Bowman that affected discussions about potential rate cuts.

Euro US Dollar Pair Reflects This Trend

The EUR/USD pair shows the dollar’s strength, as its main hourly moving averages remain stable. This indicates that dollar buyers are staying strong amid concerns about tariffs. Without Trump’s influence and the dovish outlook, the dollar might have risen more sharply, and conversations about a September rate cut could have been less significant. Even though the dollar has recently gained ground, market sentiment is still shaky. Any shifts in the views of Fed policymakers could lead to changes. The ongoing short squeeze isn’t necessarily a trend reversal; it’s crucial to watch market charts while keeping an eye on tariff developments before the August 1 deadline. The stock market is performing well, hinting that currency and bond markets might follow suit. We think the recent strength of the dollar is mainly due to a short squeeze, supported by recent data from the Commodity Futures Trading Commission. Speculators had held a large net short position against the dollar for months, setting the stage for this rally as traders scramble to cover their bearish positions. For now, opposing the dollar’s upward trend is a risky bet. Trump’s tariff threats before the August 1 deadline are the key focus right now. In the past, during the trade disputes of 2018-2019, the Dollar Index (DXY) climbed as uncertainty made it a safe haven. With the one-month implied volatility for major currencies still low, buying options for sudden market moves could be a smart strategy.

The Federal Reserve’s Influence on the Market

However, a strong opposing force is the Federal Reserve’s policy. The dovish remarks from officials like Mr. Waller and Ms. Bowman have strengthened market expectations for easing, with futures markets indicating a high chance of a rate cut by September. This pressure from the central bank limits how much the dollar can rise. With this tug-of-war, we’re using technical analysis to inform our short-term trades. The Dollar Index hitting resistance suggests we’re seeing a corrective bounce rather than a new bull market. This makes strategies like selling call options or setting up bear call spreads above key resistance levels appealing to earn premiums while managing our risk. We also need to pay attention to the significant divergence with equities, which are telling a different economic story. The stock market’s rise to new highs reflects a “risk-on” mood, typically unfriendly to the dollar. This disconnect suggests that either the currency market will need to adjust by selling off the dollar, or the stock market could be due for a correction. Create your live VT Markets account and start trading now.

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