The dollar has experienced a recovery over the past two weeks, influenced by tariff threats from Trump. This has raised questions about the future trajectory of the dollar, especially in relation to potential tariff implementations on 1 August. The general assumption is that tariffs haven’t yet impacted US inflation significantly, though they may still do so.<\/p>\n
If tariffs increase, it could complicate the interpretation of inflation data further. The dollar’s recent recovery is underpinned by a short squeeze; however, it could have been stronger if not for Trump’s pressure on the Fed and dovish comments from Waller and Bowman. The dollar’s upward momentum has been visible in the EUR\/USD chart, despite potential sentiment shifts.<\/p>\n
Technical analysis is key in gauging the short squeeze, given the dollar’s decline since April. Any current recovery may not indicate a broader reversal. With upcoming tariff deadlines and potential policy changes, the dollar’s recovery remains uncertain. As Wall Street achieves record highs, there is speculation about whether other markets, including FX and bonds, will align with this momentum. Charts continue to be crucial to assess the dollar’s outlook amidst these dynamics.<\/p>\n
We see the current dollar rally as a classic short squeeze fueled by an overcrowded trade. Recent CFTC data confirms this, showing that large speculators held a significant net short position against the greenback, creating the conditions for a sharp, painful unwind for those betting against it. This suggests that any pro-dollar news could force more short-covering in the immediate future.<\/p>\n
Given the major event risk of the August 1st tariff deadline, we believe using options is the most sensible approach. Buying short-dated dollar call options, or put options on pairs like the EUR\/USD, provides direct exposure to a potential tariff-induced rally while strictly defining your maximum loss. Implied volatility on these currency pairs has already risen, signaling that the options market is bracing for a significant price move.<\/p>\n
However, the dovish pivot from policymakers like the one mentioned by Mr. Waller puts a cap on this rally. The market is pricing in a high probability of a September rate cut, with the CME FedWatch Tool showing odds consistently above 60%. This monetary policy outlook will act as a headwind, making a sustained, multi-month dollar bull run unlikely.<\/p>\n
Looking back at the 2018-2019 trade conflict provides a useful roadmap for what could happen next. During that period, the U.S. Dollar Index (DXY) initially strengthened on safe-haven demand as global growth fears escalated, rallying over 8% even as tariffs were being implemented. This historical precedent reminds us that a messy trade situation can paradoxically boost the currency in the short term, regardless of the long-term economic impact.<\/p>\n
Technically, we are watching key levels on the charts to gauge the squeeze’s durability. The dollar index breaking and holding above its 50-day moving average is a critical first step in confirming a change in trend from bearish to neutral. The divergence with the stock market reaching new highs suggests that foreign exchange traders have been more complacent, and may have to play catch up if risk sentiment suddenly sours.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" The dollar rebounds amid tariff threats, short squeeze, and Fed pressure; outlook remains uncertain with upcoming deadlines.<\/p>\n","protected":false},"author":62,"featured_media":16966,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-26787","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/26787","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=26787"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/26787\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/16966"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=26787"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=26787"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=26787"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}