Is there more legs to the dollar short squeeze?

Is the dollar let out of the dog house just yet? Well, not exactly. The latest recovery in the greenback in the past two weeks comes as Trump is threatening tariffs once again. It’s a more moderate version of Liberation Day one might say, with TACO trades seemingly fully priced in before this. So, what’s next for the dollar from here?

In the bigger picture, it’s all about whether or not Trump will follow through on his tariff threats come 1 August. That’s the main thing to watch. He’s kicked the can down the road long enough for it to stall any major impact on US inflation, seemingly creating a belief that tariffs aren’t going to materially impact prices.

Spoiler alert, it will – even if the impact may not be all too sticky and permanent. But if even higher tariffs are coming in the months ahead, that will continue to make it tricky in reading inflation data.

Circling back to the dollar, it has managed to find better footing as the short squeeze starts to build in the last two weeks. The thing is, it could’ve really been much better for the dollar and the squeeze be more violent had it not been for those meddling kids. Oh, wait. Got that wrong. I mean had it not been for Trump pressuring the Fed and then Waller and Bowman both turning a more dovish cheek.

The dollar’s recent momentum is quite evidently highlighted in the near-term chart for EUR/USD. The pair has been defended by its key hourly moving averages at each and every chance in the last two weeks, highlighting that dollar buyers (shorts previously) are holding the line as the focus stays on Trump’s tariffs this month.

So had it not been for Trump and the more dovish takes by Waller and Bowman, we probably would’ve seen the dollar jump much more with talk about a September rate cut arguably also off the table.

But alas, that is not the reality that we’re living in. As such, even with the short squeeze still running at the moment, the dollar is not exactly safe to a turnaround in sentiment. And Waller’s simple comments yesterday were enough to test that resolve. Just another flip from any other Fed policymaker and we could very well see a complete turnaround in sentiment again.

In gauging the short squeeze, the technicals are your best friend. The dollar has been beaten down so badly since April that any pullback now is just that, and not really a major reversal in the outlook. We’ve come to fully expect tariffs and TACO that much of that appears to be priced in, as argued here last week.

Basically, it’s all about watching the charts as the short squeeze continues to run. That as the market focus stays on Trump’s tariffs follow through ahead of the 1 August deadline. But amid any further policy incoherence and TACO decisioning, that will pose a threat to the dollar’s potential recovery.

The stock market seems positioned for that as Wall Street continues to run to fresh record highs. Is FX – and the bond market as well – needing to play catch up?