The US dollar is losing strength as the US trading session begins. While it remains a popular choice among traders, stronger drivers are needed to change this trend. Recent US inflation data did not meet expectations and failed to boost the dollar. Additionally, US Treasury yields have returned to levels seen before inflation data was released. The market is expecting about two rate cuts by the end of the year, with the Federal Reserve likely to keep rates steady at the next meeting. On the 1-hour chart, the market has almost reversed the post-US CPI rally and has broken the upward trendline of the correction. Today, there are no significant news or data affecting the market. However, we need stronger reasons to shift market expectations towards a more hawkish stance to counter the current bearish trend.

Market Outlook

The market is now pricing in more than a 60% chance of a Federal Reserve rate cut by September, according to the CME FedWatch Tool. Thus, we believe the dollar is likely to keep falling. Traders in derivatives should consider positions that reflect this ongoing weakness. This supports the idea that the bearish trend remains strong without new hawkish signals. Currency market volatility is currently at multi-year lows, presenting a unique opportunity. For those skeptical about a major dollar rally before the next big event, selling out-of-the-money call options on the US Dollar Index (DXY) could be a good strategy for earning premium. This tactic takes advantage of both anticipated sideways-to-down movement and the decay of options over time. Looking back at previous easing cycles in 2007 and 2019, the dollar often underperformed as the central bank began to cut interest rates. We expect a similar trend might happen, indicating that any short-term strength in the dollar over the next few weeks could be a chance to sell rather than a sign of a trend reversal. This historical context supports a bearish to neutral outlook for the dollar.

Potential Risks

The main risk to this outlook is a sudden rise in inflation reports or an unexpectedly strong Non-Farm Payrolls figure. If the US Dollar Index consistently breaks above the 106.00 level, it could indicate a market shift towards a more hawkish stance. Traders should identify these key technical levels to manage their risks and reconsider their bearish positions if these thresholds are crossed. Create your live VT Markets account and start trading now.

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