The dollar has recently experienced a recovery due to renewed tariff threats from Trump. This comes with the anticipation of potential tariffs on 1 August, which have yet to affect US inflation. However, future higher tariffs could make inflation data more difficult to interpret.<\/p>\n
Over the past two weeks, the dollar’s position has improved alongside a short squeeze. This situation could have been better if Trump hadn’t pressured the Federal Reserve, alongside Waller and Bowman’s dovish stances, which influenced potential rate cut discussions.<\/p>\n
The EUR\/USD pair reflects the dollar’s momentum, as its key hourly moving averages remain defended. This demonstrates the resilience of dollar buyers amid the focus on tariff threats. Without Trump’s influence and dovish tilt, the dollar might have increased more significantly, and discussions of a September rate cut might have diminished.<\/p>\n
Despite the dollar’s recent improvement, sentiment remains volatile. Any changes in sentiment by Fed policymakers could cause a shift. The ongoing short squeeze is not necessarily a reversal; it\u2019s essential to monitor charts while focusing on tariff developments before the 1 August deadline. The stock market continues to perform strongly, suggesting currency and bond markets might follow its lead.<\/p>\n
We believe the recent dollar strength is a classic short squeeze, and recent positioning data from the Commodity Futures Trading Commission confirms this view. Speculators held a significant net short position against the dollar for months, creating the perfect fuel for this rally as traders are forced to buy back their bearish bets. For now, this means fighting the dollar’s upward trend is a risky play.<\/p>\n
The former president’s tariff threats ahead of the August 1st deadline are the main event on our radar. Historically, during the 2018-2019 trade disputes, the Dollar Index (DXY) rallied as uncertainty boosted its safe-haven appeal. With one-month implied volatility for major currency pairs still relatively subdued, buying options to position for a sudden move could be a cost-effective strategy.<\/p>\n
However, we see a powerful force working against a sustained rally in the form of Federal Reserve policy. The dovish comments from officials like Mr. Waller and Ms. Bowman have reinforced market bets on easing, with futures markets currently pricing in a high probability of a rate cut by September. This pressure from the central bank effectively puts a ceiling on how high the greenback can go.<\/p>\n
Given this tug-of-war, we are using technicals to guide our short-term trades. The Dollar Index finding resistance suggests this is a corrective bounce rather than a new bull market. This makes strategies like selling call options or establishing bear call spreads above key resistance levels attractive to collect premium while defining our risk.<\/p>\n
We also can’t ignore the major divergence with equities, which are signaling a different economic story. The stock market’s run to fresh records shows a “risk-on” mood that is typically negative for the dollar. This disconnect implies either the currency market will eventually have to sell off the dollar, or the stock market is due for a correction.<\/p>\n
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