The dollar is experiencing an upward trajectory, with EUR/USD falling 0.5% to 1.1580 and USD/JPY rising 0.5% to 148.60. This shift brings EUR/USD near yesterday’s lows, influenced by US PPI data.
Meanwhile, AUD/USD has dropped to its lowest in over three weeks, falling below 0.6500. A weaker Australian labour market report has further pushed the pair down by 0.9% as European markets open.
Trumps Foreign Aid Bill
In US politics, the Senate passed a bill initiated by Trump to cut foreign aid, with a vote of 51 to 48. This decision will result in $9 billion in additional spending cuts by the administration.
We see the dollar’s momentum as the central play for the next few weeks. Recent US inflation data, with the Producer Price Index rising 2.2% year-over-year, shows price pressures remain persistent and give the Federal Reserve little reason to cut rates. This environment favors buying call options on dollar-tracking funds or puts on the Euro to play the policy divergence.
The leak in the Australian dollar also presents a clear opportunity, especially given the soft domestic data mentioned. With Australia’s unemployment rate recently ticking up to 4.1% and job creation missing forecasts, the Reserve Bank of Australia is likely to remain dovish compared to its US counterpart. We believe purchasing put options on AUD/USD is a direct way to trade this weakness.
Interest Rate Expectations
The move in USD/JPY recalls the powerful rally seen through much of 2022 when US rate expectations far outpaced those in Japan. With the CME FedWatch tool now showing traders pricing out any imminent rate cuts from the US, the interest rate gap with Japan is set to remain substantial. This supports staying long the pair, perhaps through call spreads to manage costs as the pair nears multi-decade highs.
The bill passed by the Senate adds another layer of support, as the resulting fiscal tightening is inherently dollar-positive. We should anticipate a rise in currency market volatility, with bond market volatility gauges like the MOVE index already sitting at elevated levels. Traders should consider this when pricing options, as premiums may become more expensive.
