Low interest rates and a tepid dollar could only last for so long, and now bullishness could be back for the greenback, which bodes well for exchange traded funds (ETFs) such as the Invesco DB US Dollar Bullish (UUP).

In looking at the ICE U.S. Dollar Index, a dose of volatility thanks to inflation fears picked up in mid-April, causing the index to rise past the 3.6% mark. The index has since come back down to earth, but ongoing inflation fears could be paving the way for another move higher.

In the meantime, trading action in UUP is erring on the side of bullishness. UUP tracks the price movement of the U.S. 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 of $24.09 (1/6/21) earlier last week, UUP attracted bullish looking in-the-money call buyers,” noted a GTS Mischler ETF Weekly report via email. “The July 24 calls traded on two separate occasions last Wednesday and Thursday, more than 55,000 contracts in total and UUP rallied above recent lows. The $386 million fund has seen smallish asset growth YTD ($>22 million in).”

^DXY Chart

Inflationary Pressure Stonewalls Gold, Lifts Dollar

The counterbalancing asset to the dollar is gold. Inflationary pressures are stonewalling a bullish move for gold as the expectation of rate increases tick higher.

“Further signs of inflationary pressures could sweeten appetite for gold … However, upside gains may be capped by an appreciating dollar if inflation fears send U.S. Treasury yields climbing,” said Lukman Otunuga, senior research analyst at FXTM.

The Federal Reserve has been relatively quiet on future interest rate policy, but the prevailing sentiment is that an improving economy will warrant rate increases at some point. Higher yields can stifle the appetite for gold moving forward while rate increases can provide the tailwinds for the dollar.

“There is a sense in the market that the Fed got the market under control saying that the inflation is transitory, so that’s the whole focus right now, whether that can be achieved or not,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Gold Price in US Dollars Chart

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