The US dollar is steady as trading begins on July 22, 2025, showing little change against major currency pairs like EUR/USD, USD/JPY, and GBP/USD. The Reserve Bank of Australia (RBA) minutes reveal support for further rate cuts, but most members decided to keep the cash rate at 3.85%, wanting to confirm ongoing inflation reduction first. Bank of England Governor Andrew Bailey remarked that the UK’s steep yield curve matches global trends, influenced by trade and fiscal policy uncertainty. He pointed out that shorting the US dollar has become very popular, with demand for dollar assets dropping. The recent weakness of the US dollar seems to be easing, hinting at a possible short squeeze.

Expectations On Powell’s Speech

Fed Chair Jerome Powell is scheduled to speak at a conference about capital frameworks for large banks during the Fed’s blackout period. His comments are likely to focus on regulatory issues, but may touch on sensitive market topics. Futures show little change for US indices at the market’s opening, while European indices, especially the German DAX and France’s CAC, are declining. Yields in the US debt market increased slightly after yesterday’s drop. The Richmond Fed composite index for July will be released at 10 AM, following a stronger-than-expected Philly Fed index. Given the current market situation, we consider Bailey’s remarks to be the most crucial information for the upcoming weeks. His warning about the crowded shorting of the US dollar, alongside its weakening trend, sets the stage for a potential reversal. This indicates that the dollar may soon rise, catching most market players by surprise. As such, our main strategy should be to protect against or prepare for a dollar short squeeze. We plan to buy call options on the US Dollar Index (DXY) or specific pairs like USD/JPY to take advantage of price increases with limited risk. The latest Bank of America Global Fund Manager Survey shows that “long big tech” and “short US dollar” have been the most popular trades for months, and history indicates that such consensus trades often don’t end well.

Market Volatility And Dollar Rally

The cautious outlook from the RBA and the uncertainty noted by the Bank of England govern suggest market volatility might be underestimated. The CBOE EuroCurrency Volatility Index (EVZ) is around 5.5, close to 12-month lows, which we believe is too complacent. We see an opportunity to buy straddles on the EUR/USD, a strategy that benefits from significant price moves in either direction, reflecting market tension. A stronger dollar could also create challenges for US multinational companies, as their foreign earnings would decrease in dollar terms. To hedge this risk, we are considering buying out-of-the-money put options on the S&P 500 index. Historically, rapid dollar rallies, such as the one in early 2021, often lead to periods of consolidation or weakness in the broader stock market. Although Powell’s speech is not expected to shift the market significantly, any deviation from the expected regulatory focus could serve as an unexpected trigger. We will carefully monitor his language and the upcoming Richmond Fed data release. A stronger-than-expected economic report could spark the dollar rally we anticipate. Create your live VT Markets account and start trading now.

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