Dollar bullish sentiment hits three-week high! Options traders bet that Powell will stick to hawkish stance.

The bullish sentiment towards the US dollar in foreign exchange options has reached its highest level in three weeks, as traders bet that Federal Reserve Chairman Powell will not take an overly dovish stance on interest rate cuts. Prior to Powell's highly anticipated speech at the Jackson Hole Global Central Bankers Symposium, Bloomberg's US Dollar Spot Index's one-month risk reversal index jumped to its highest level since July 31. At the same time, the US dollar reached its highest level against a range of other currencies since August 5, with hopes of accumulating a 0.7% increase this week. Sonja Marten, head of foreign exchange and monetary policy research at Germany's DZ Bank, said, "The door is wide open for a 25 basis points rate cut by the Federal Reserve in September, but I don't think Powell will be more aggressive than that." Despite pressure from US President Trump and other officials for Powell to make significant interest rate cuts, Sonja Marten bluntly stated that Powell may resist. She said, "Powell will very clearly state that he will not succumb to pressure from the White House and take a path that may fundamentally not make sense." The weak US July non-farm payroll report released earlier this month, as well as the significant downward revisions to job additions in May and June, indicated labor market weakness and quickly raised expectations for a Fed rate cut. However, minutes from the Fed's July Federal Open Market Committee (FOMC) meeting released on Wednesday showed policymakers were more concerned about stubborn inflation. Currently, traders are betting that the Fed will cut rates by 47 basis points by the end of the year, compared to over 63 basis points just over a week ago. Sonja Marten noted that further repricing increases the possibility of the US dollar continuing its upward correction, especially against the euro. Last month, the US dollar fell to its weakest level against the euro in nearly four years, leading to a large number of long euro positions in the market. Sonja Marten pointed out that if Powell's speech weakens the euro against the US dollar, "the trend could accelerate as these positions are unwound. People are no longer expecting to see a level of 1 euro to 1.20 dollars anytime soon." Nick Rees, head of macro research at Monex Europe, said that any hint from Powell of a possible rate cut in September being "overly focused on" could trigger an initial sell-off of the US dollar - although this could be temporary. He said, "Overall, we expect a hawkish tone, which will further strengthen the dollar this weekend."