The US Dollar has strengthened following a deal on Greenland that led to the removal of planned EU tariffs. Risk assets also rose in response, but markets await further details before shifting focus completely.
President Trump will delegate further negotiations to officials like JD Vance and Marco Rubio. The upcoming Federal Reserve meeting on 28 January may shift attention back to macroeconomic factors, with stabilising unemployment and a Department of Justice investigation into Powell influencing a potentially more hawkish stance.
Jerome Powell Response To Investigation
Jerome Powell’s response to the investigation suggests upward risks for the dollar, as he might assert more hawkish positions in future meetings to communicate independence. Despite some potential downside risks for the dollar, such as volatility in JGBs affecting Treasuries and scrutiny on upcoming US tech earnings, the macroeconomic environment remains supportive for the US currency in the short term.
We recall the dollar rally in early 2025 after the Greenland framework deal prompted the scrapping of EU tariffs. Current high-level trade negotiations over critical mineral access are creating a similar atmosphere of uncertainty and opportunity. In the week following the Greenland announcement last year, the Dollar Index (DXY) climbed over 1.2%, a historical precedent we are watching closely.
The dynamics surrounding the Federal Reserve last year also offer a guide for the upcoming January 28th meeting. The Fed’s hawkish turn following the investigation into its leadership in 2025 showed a desire to reinforce its independence. With December’s core inflation data recently coming in at a higher-than-expected 2.8%, the Fed has justification to maintain a firm stance, which should support the dollar.
Positioning For Potential Dollar Strength
This suggests positioning for potential dollar strength through call options on the USD, particularly against currencies with more dovish central banks. Implied volatility in major currency pairs spiked significantly in the days surrounding the 2025 Greenland news, so acquiring options now could be advantageous before a similar rise. We are focusing on USD/JPY call options, as any further JGB volatility could amplify the dollar’s safe-haven appeal.
However, risks persist, just as they did last year with scrutiny on tech earnings. We see a similar environment now, with major tech firms set to report next week amid concerns over slowing global growth. Traders with long dollar positions should therefore consider hedging with protective puts on tech-heavy indices like the Nasdaq 100.
