The US Dollar Index (DXY) fell about 0.20% on Monday after reaching a 15-week high near 99.70 early on. It opened with a gap up, then slipped back towards 99.00 by the close, following a rally from late-January lows near 95.56 of about four points in six weeks. The US Dollar has risen amid the Strait of Hormuz crisis, with markets assessing the US as less exposed to the supply shock due to energy independence. Expectations for Federal Reserve cuts have shifted to one 25 basis-point cut this year, likely in September, down from two previously priced.

Fed Policy And Key Inflation Data

The Federal Reserve is holding rates at 3.50% to 3.75%, and January FOMC minutes said several officials discussed possible rate rises if inflation stays above target. February CPI data is due on Wednesday, with forecasts of 0.3% month-on-month and 2.4% year-on-year. On Friday, January core PCE is expected at 0.4% month-on-month and 3% year-on-year. Preliminary fourth-quarter GDP is forecast at 1.4% annualised, and the University of Michigan March sentiment index is seen at 55, down from 56.6. We recall the market dynamics of early 2025, when the Strait of Hormuz crisis pushed the US Dollar Index toward a 15-week high near 99.70. That sharp rally was fueled by safe-haven demand and a rapid repricing of Federal Reserve expectations. Today, the DXY is trading in a more subdued range around 103, as the geopolitical risk premium has faded. Last year’s energy shock forced the Fed to hike rates through the summer of 2025 to fight the resulting inflation, which peaked at 4.2% according to Bureau of Labor Statistics data. Now, with the latest February 2026 CPI report showing inflation has cooled to 2.8% year-over-year, the market has shifted focus entirely. The Fed is holding its policy rate steady at 4.50-4.75%, and derivatives markets are now pricing in a 70% chance of a first rate cut by July. Given this backdrop, traders should consider strategies that benefit from a stable-to-weaker dollar and falling interest rate volatility. Selling out-of-the-money call options on the DXY or buying puts could offer favorable risk-reward profiles. With the VIX trading near a 12-month low of 14.5, selling volatility through options on interest rate futures like the 3-Month SOFR contract may also be an attractive play.

Positioning For Rate Cuts

The economic calendar is now less about upside inflation surprises and more about signs of a slowdown, a stark contrast to the inflation panic of 2025. We’ve seen this in the final Q4 2025 GDP reading, which was revised down to a sluggish 0.8% annualized growth. All eyes will be on this month’s Non-Farm Payrolls report for further evidence of a cooling labor market that would give the Fed a green light to ease policy. Therefore, positioning for lower interest rates appears to be the primary trade. Using options on Fed Funds futures to speculate on the timing and magnitude of rate cuts is a direct way to express this view. This is a significant pivot from early 2025, when the dominant strategy was hedging against persistent inflation and further Fed hawkishness. Create your live VT Markets account and start trading now.

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