The US Dollar Index rose 0.36% on Friday to about 99.50, with spot at 99.47, after hawkish remarks from Federal Reserve Chair Kevin Warsh at Jackson Hole prompted a sharp reassessment of the US rate path. Warsh reiterated the Fed’s 2% PCE inflation target and said officials must be confident underlying inflation is moving towards it, despite summer data improving. Rate expectations shifted accordingly: the CME FedWatch Tool showed a 56% probability of a September hike, up from roughly 36% before the speech.
US data were mixed. The BLS preliminary Nonfarm Payrolls benchmark revision showed employment for the 12 months through March was cut by 79K, or 0.1%, after last year’s 911K reduction. The University of Michigan sentiment gauge for August was revised up to 51.7 from 51, but remained below July’s 55.2, while expectations rose to 51.5 from 50.6 yet trailed July’s 55.4. One-year inflation expectations eased to 4% from 4.3%, and the five-year measure held at 3.3%. Technically, DXY traded above the 100-hour and 200-hour SMAs at 99.08 and 99.06, with RSI near 75, resistance around 99.70, and trend-line support near 99.16 alongside 99.26.
US Dollar Derivative Strategies Following Hawkish Fed Signals
We believe derivative traders should prepare for continued US Dollar strength in the coming weeks following the hawkish signals from the Jackson Hole Symposium. Since the CME FedWatch Tool now shows a 56% chance of a September rate hike, short-term interest rate futures are rapidly pricing in tighter monetary policy. We should look to buy USD call options on dips, targeting a breakout above the immediate 99.70 resistance level.
Managing Risk and Opportunities Amid Potential Consolidation
However, because the hourly Relative Strength Index (RSI) is currently hovering around a stretched 75, we must anticipate some brief consolidation. Historical trading data shows that when the US Dollar Index reaches these overbought levels, it often experiences a minor pullback of 0.2% to 0.4% before the broader trend resumes. We suggest setting limit orders to buy call options or enter long futures positions near the rising trend-line support at 99.16.
We can also exploit the shifting rate expectations by positioning in the interest rate options market, specifically targeting puts on short-term Treasury futures as yields adjust to the hawkish outlook. Given that the benchmark payroll revision was a mild 79K compared to much larger historical downward revisions, the labor market remains resilient enough to sustain these higher rates. We recommend placing defensive stop-losses just below the 200-hour moving average at 99.06 to protect capital against any unexpected economic turnarounds.
