The US dollar sets the stage for more optimism
LInterest rates and a lukewarm dollar might only last a while, and now optimism may be back for the greenback, which bodes well for exchange-traded funds (ETFs) such as the Invesco DB Bullish US Dollar (UUP).
Looking at the ICE US Dollar index, a dose of volatility due to inflation fears intensified in mid-April, causing the index to rise above the 3.6% mark. The index has since come back down to earth, but lingering inflation fears could pave the way for another hike.
Meanwhile, trade action in UUP sins on the side of optimism. UUP tracks the price movement of the US dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
“Flirting with its 52-week low at $ 24.09 (1/6/21) earlier last week, UUP has drawn bullish call buyers into the course,” noted a weekly GTS Mischler ETF report. by email. The July 24 calls were traded twice Wednesday and last Thursday, more than 55,000 contracts in total and UUP broke recent lows. The $ 386 million fund saw weak asset growth on the fiscal year (> $ 22 million). “
Inflationary pressure locks gold and raises dollar
The counterweight asset to the dollar is gold. Inflationary pressures are blocking a bullish move for gold as rate hike expectations rise.
“Further signs of inflationary pressures could soften the appetite for gold … However, upward gains could be limited by an appreciating dollar if inflation fears drive up US Treasury yields,” mentionned Lukman Otunuga, Senior Research Analyst at FXTM.
The Federal Reserve has been relatively silent on future interest rate policy, but the prevailing feeling is that an improving economy will justify rate hikes at some point. Higher yields can stifle the appetite for gold in the future while rate hikes can provide favorable winds for the dollar.
“There is a feeling in the market that the Fed has subdued the market by saying that inflation is transient, so that’s all the attention right now whether it can be achieved or not,” mentionned Ole Hansen, Head of Commodities Strategy at Saxo Bank.
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