Despite Powell's Dovish Stance, Dollar Options Signal Strength

Currency options signaled the strongest bullish sentiment for the U.S. dollar in three weeks as traders positioned for Federal Reserve Chair Jerome Powell to avoid sounding too dovish on rate cuts.

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One-month risk reversals tied to the Bloomberg Dollar Spot Index surged to their highest level since July 31, just before Powell’s much-anticipated address at the central bank’s annual Jackson Hole gathering.

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The greenback strengthened to its firmest level since August 5 and is on track to post a weekly gain of about 0.7%.

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“The door remains open for a 25 basis-point cut in September,” said Sonja Marten, head of FX and monetary policy research at DZ Bank AG, during an interview with Bloomberg TV. “But I don’t expect Powell to signal anything more aggressive than that.”

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Despite mounting calls from President Donald Trump for substantial rate cuts, Marten believes Powell will stick to an independent course. “He’ll make it very clear that the Fed won’t be swayed by the White House into taking steps that lack fundamental justification,” she said.

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Market expectations have shifted notably in recent days. Traders are now pricing in around 47 basis points of easing by year-end, down from 63 basis points just over a week ago.

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Earlier this month, a weaker-than-expected U.S. jobs report had fueled speculation that larger cuts were imminent. However, the latest Federal Open Market Committee (FOMC) minutes suggest policymakers remain more concerned about persistent inflation pressures than about slowing employment.

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Further adjustment in rate expectations could extend the dollar’s upward correction, particularly against the euro, according to Marten. The U.S. currency had recently rebounded from a sharp slide that drove it to its weakest level in nearly four years versus the euro.

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That move left markets holding an excess of long euro-dollar positions, creating a potential catalyst for further gains in the greenback.

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“If Powell’s comments spark euro weakness, those positions could unwind quickly, accelerating the move,” Marten warned. “At this point, hopes for $1.20 in the euro-dollar pair have largely faded.”

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Investors will be scrutinizing Powell’s speech for any language hinting at the possibility of a September cut. However, some analysts argue the market may be overreacting to such signals. Nick Rees, head of macro research at Monex Europe, noted that any initial dollar selling prompted by dovish interpretations would likely be temporary.

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“Ultimately, we expect Powell to strike a more hawkish tone, which should support additional dollar gains through the end of the week,” Rees said.

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