The US Dollar Index was trading near 99.00 in early European hours on Wednesday, recovering some ground before the US July PCE Price Index later in the day. Policy action has also been in focus after Treasury Secretary Scott Bessent said bond buybacks would be lifted to at least $4 billion per operation from a $2 billion maximum, as scrutiny grows with national debt above $40 trillion. Separately, Reuters reported an expansion of secondary sanctions linked to Iran. Rate expectations have shifted too: markets now imply a 38.4% chance of a 25 bps rise in September, down from 67% earlier this month, based on the CME FedWatch tool.
Technicals keep the tone cautious, with DXY below the 100-day SMA and the Bollinger band midline, while the RSI sits at 34.60. Resistance is seen around 99.55 at the Bollinger midline, then 99.70 at the 100-day SMA, and 100.40 at the upper band. Support is indicated at 98.65 on the lower band, and traders are also watching Fed Chair Kevin Warsh’s Jackson Hole speech on Friday for interest-rate direction.
Expectations for Volatility and Derivative Positioning
We suggest derivative traders prepare for heightened volatility over the next forty-eight hours as the US PCE inflation data drops today, followed by Fed Chairman Kevin Warsh’s Jackson Hole speech on Friday. With the market pricing in only a 38.4% chance of a September rate hike, option traders should consider buying short-dated straddles to profit from sharp currency swings. Historically, major monetary policy surprises at Jackson Hole have caused the dollar index to move by more than 1% within a matter of days.
Technical Set-Up and Macro Hedging Strategies
Technically, we see the DXY hovering near 99.00, just above its lower Bollinger band support of 98.65. Since the Relative Strength Index is near oversold levels at 34.60, we recommend employing bear put spreads to capture a potential break below 98.65. However, we must remain cautious of a hawkish surprise that could quickly push the index back toward its 100-day moving average of 99.70.
Meanwhile, the Treasury’s plan to double bond buybacks to $4 billion to manage the $40 trillion national debt will likely cap long-term yields. We advise traders to use interest rate swaps or long-dated Treasury options to hedge against these artificial caps on borrowing costs. Additionally, we should monitor how secondary sanctions on Iran might trigger sudden safe-haven flows back into the greenback.
