The US Dollar Index is currently below 98.00, with the currency fluctuating between gains and losses this week due to weak US yields. Traders are keeping an eye on US-EU trade talks as potential high tariffs loom on August 1. A trade agreement between the US and EU seems unlikely, raising the risk of 30% tariffs on the EU. US Treasury Secretary indicates that Jerome Powell should stay in his role, emphasizing Powell’s focus should be on the Federal Reserve’s non-monetary responsibilities.

Upcoming Economic Events

The Richmond Fed Manufacturing Index and the API’s oil stockpile report are important upcoming US economic events. Technical analysis indicates the index may drop to 95.13 if it falls below 96.37, with resistance around 99.42. Currently, there is a negative trend below the 200-day SMA of 103.49. In terms of currency performance, the US Dollar has seen mixed results against major currencies, gaining 0.07% against the Euro but losing up to 0.38% against the Japanese Yen. A detailed comparison of the US Dollar against other currencies is available in the heatmap. With ongoing pressure on the US Dollar and weak yields, we advise traders to prepare for further declines. We suggest buying put options with strike prices below the 96.37 support level, aiming for the technical target around 95.13. This bearish position is supported by the index being well below its long-term 200-day moving average, indicating a consistent downward trend. The upcoming trade discussions with the EU create significant risks for market events, and we should brace for increased volatility. Past experiences, like the 2018 steel and aluminum tariffs, led to sudden price swings in the EUR/USD pair, and similar volatility could happen if new tariffs are introduced. We recommend buying straddles or strangles on the Euro to profit from substantial price movements in either direction.

Outlook on Monetary Policy

We consider the remarks about Mr. Powell’s responsibilities as political noise that distracts from the essential issue of monetary policy. Market data supports this, as the CME FedWatch Tool currently shows over a 60% chance of at least one Federal Reserve rate cut by September 2024. This expectation for looser policy is likely to continue pressuring the dollar. The dollar’s current weakness against the Japanese Yen also presents a clear opportunity. We recommend buying put options on the USD/JPY pair to take advantage of this trend, as the Yen often appreciates when the dollar weakens. Recent trends show that the dollar has fallen against the Yen, providing momentum for this trade. The upcoming economic reports are expected to create short-term price fluctuations. With market volatility indices like the MOVE Index (which tracks bond market volatility) remaining high compared to their historical lows, we believe currency volatility is currently underestimated. This situation makes it inexpensive to buy options to hedge against or speculate on sharp market moves driven by these reports or trade developments. Create your live VT Markets account and start trading now.

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