Insights 
VT 
The US dollar has strengthened against commodity currencies, with notable gains against the AUD (1.09%), CAD (0.63%), and NZD (0.61%). The dollar also rose against EUR (0.48%) and JPY (0.55%), while its increase against GBP was smaller at 0.22%.
US yields have moved higher, with the two-year yield increasing 3.2 basis points to 3.917% and the 10-year yield rising by 1.4 basis points. These factors are contributing to USD strength.
Tariff Impacts
Tariff impacts are a concern, with potential tariffs possibly affecting Germany’s economic outlook. Without tariffs, inflation would likely be closer to 2%. Currently, tariffs could add about 1% to inflation from late 2025 into 2026.
Inflation moderated to 2.5% in June, with core inflation at 2.75%. Expectations include a 3%-3.5% inflation rate this year, 2.5% in 2026, and a drop to 2% in 2027.
The labour market is slowing, with eased job growth and a projection of 4.5% unemployment by year-end. Economic growth is projected at approximately 1% for 2025, influenced by uncertainty. The process of disinflation continues amidst supportive financial conditions. Current Fed policy aims to moderately affect the labour market while allowing for data-driven adjustments.
Strategies and Market Volatility
Given the dollar’s momentum, we should favor strategies that benefit from its continued strength, particularly against the Australian and New Zealand dollars. The rise in short-term U.S. yields, with the two-year rate pushing back above 3.9%, provides a fundamental tailwind for these positions. This is further evidenced by the U.S. Dollar Index (DXY) recently trading at multi-month highs above the 107 level.
The statements from Williams reinforce a patient, data-dependent central bank, meaning we should anticipate heightened market volatility around key economic releases. Upcoming inflation and employment reports will be critical triggers, making options strategies that profit from price swings, such as long straddles, attractive around those dates. This view is supported by historical patterns where Fed “wait-and-see” periods lead to choppy, news-driven markets.
The tariff concerns expressed by Nagel specifically targeting the German economy suggest a significant downside risk for the single currency. We should therefore consider positioning for weakness in the EUR/USD pair, as a potential German recession would weigh heavily on the entire Eurozone. Recent soft data, such as the German Ifo Business Climate index which fell to 87.3 in June, validates these concerns about Europe’s largest economy.
The forecast for U.S. inflation to remain above 3% for the rest of the year solidifies the case for higher-for-longer interest rates. Market pricing reflects this, with the CME FedWatch Tool now indicating a probability of less than 50% for a rate cut in September, a sharp decline from over 65% just a month ago. This shift makes holding long dollar positions more compelling as interest rate differentials are likely to remain favorable.
The projection of U.S. unemployment rising toward 4.5% alongside slowing growth points to a deliberate economic cooling, not a collapse. This controlled slowdown gives policymakers room to maintain their current stance without panicking into premature easing. This stability, contrasted with growing uncertainty in other regions, should continue to attract capital flows into the U.S., supporting the greenback.
