The US Dollar ended the week stronger after a better than expected nonfarm payrolls report. It rose most against the Australian Dollar and the Norwegian Krone.
The focus then turned to the US Consumer Price Index (CPI) report for January. The Dollar did not extend its early gains after the payrolls data.
Fed Policy And Inflation Outlook
The report said the CPI data may affect how markets view the Federal Reserve’s next steps. It stated that softer CPI could show core inflation is still slowing.
The article listed factors that could support further Fed rate cuts this year. These included stronger productivity growth, weaker effects from earlier tariff rises, and slower wage growth and inflation.
It also said that reversing some tariff increases could reduce inflation pressures. It added that this could give the Fed more room to lower rates, which could weaken the US Dollar.
Looking back to early 2025, we saw the dollar gain strength from a robust labor market, even as we anticipated Fed rate cuts. The prevailing view was that slowing inflation would weaken the dollar throughout the year. Those expectations were largely met as the Fed initiated an easing cycle in the second half of 2025.
Derivative Trading And Volatility
The situation has now shifted as we move through February 2026. Last month’s jobs report showed a resilient labor market, adding 195,000 jobs against an expectation of 170,000. More importantly, the January CPI report released this week showed core inflation holding firm at 2.8%, complicating the Federal Reserve’s path forward.
This suggests the dollar’s recent rebound has further to run as markets scale back expectations for additional rate cuts this year. Derivative traders should consider positions that benefit from a stronger dollar in the short term. The path of least resistance for the US dollar appears to be upward until we see a decisive downturn in inflation or labor data.
The uncertainty around the Fed’s next move is causing implied volatility to rise, with the CVOL index for major currency pairs ticking up from 6.5 to 7.8 over the last month. This makes options strategies like long straddles or strangles on pairs like EUR/USD more appealing to trade the potential for sharp moves. Hedging against renewed dollar strength is also prudent.
We should look closely at dollar strength against currencies with more dovish central banks, such as the Australian Dollar. The Reserve Bank of Australia is signaling a greater willingness to cut rates than the Fed currently is. This makes call options on USD/AUD or put options on AUD/USD a relevant strategy for the coming weeks.
The disinflationary boost we had hoped for from tariff rollbacks in 2025 did not fully materialize, leaving inflation stickier than anticipated. This historical context reinforces the current view that the Fed may remain on hold longer than markets priced in late last year. Therefore, positioning for a period of sustained dollar firmness is a logical response.
