The US Dollar is gaining strength as traders rethink the Federal Reserve’s policy after the June CPI report. Expectations for a July rate cut have dropped to just 2.6%, and the chances of a cut in September are also lower. The Dollar Index is solid at 98.70, its highest level since June 23. The June CPI shows a monthly inflation increase of 0.3%, the biggest rise in five months, bringing the annual rate to 2.7%. Core CPI rose by 0.2% monthly.

Federal Reserve Commentary

Fed Chair Powell warns against quick rate cuts because of tariff effects. There’s ongoing debate about whether inflation caused by tariffs will last. President Trump is calling for rate cuts and supports crypto legislation, trying to make the US a leader in digital assets. Trump also mentions serious tariffs on Russia if a peace deal in Ukraine isn’t reached soon, which heightens tensions. Treasury yields have climbed above 4.43%, indicating that inflation may stick around. Trump’s comments against Powell add more complexity to the situation. The Supreme Court has limited the president’s ability to remove a Fed Chair, who can only be dismissed for misconduct. Traders are paying close attention to upcoming Fed speeches after the higher-than-expected inflation numbers. The US Dollar Index (DXY) shows positive momentum, with strong support at 98.00 and moving towards 99.00.

Market Strategy

The market’s return to reality gives us a clear advantage. The latest CME FedWatch Tool shows that the chances of a September rate cut have fallen below 65%. This change is significant compared to the high certainty seen just a few months ago. It signals a lasting shift in monetary policy, and we need to adjust our strategies. Our main focus should be on staying long the dollar, but our choice of instruments will greatly impact our success. We are now concentrating on options to manage incoming volatility. With the Dollar Index consolidating its strength above the 105.00 mark, outright long futures come with considerable overnight risk. Instead, we are using bull call spreads on dollar-tracking ETFs like UUP. This method helps manage our risk while taking advantage of a gradual rise towards the 107.00 level, without paying full price for basic long calls, especially with the Cboe Currency Volatility Index (EUVIX) beginning to rise. Additionally, we are purchasing put options on the Euro, as the European Central Bank seems likely to cut rates before the Fed, creating a notable policy gap. Historically, such gaps have boosted the dollar. For instance, between 2014 and 2016, the DXY surged over 25% when the Fed indicated tightening while the ECB was easing. With the latest Eurozone inflation figures for May at 2.6%—still above target but amid a weaker economic outlook—the ECB is under significant pressure to take action. Powell’s remarks about persistent inflation are at the heart of our strategy. The latest CPI figures are 3.3% for headline inflation and 3.4% for core inflation, showing that the final stages of fighting inflation are the toughest. The political dynamics—pressures from the president and threats of new tariffs—make the Fed’s path more complicated and create volatility, which is advantageous for traders like us. Now is not the time for complex strategies that depend on stability. Instead, we should pursue straightforward plays that benefit from the widening gap between a strong Fed and other central banks. As long as two-year Treasury yields stay above 4.7%, offering a significant carry advantage, the dollar’s upward trend is likely to continue. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now