The US dollar is steady in European morning trading after falling last Friday due to the US jobs report. Markets are calm as investors consider the possibility of a rate cut by the Federal Reserve in September, shifting focus from economic worries to potential lower interest rates. The EUR/USD pair is down 0.2% at 1.1560, affected by large option expirations that are setting price limits for the day. On the other hand, USD/JPY is up 0.4% at 147.97, and USD/CHF has risen by 0.6% to 0.8085.

Commodity Currencies Remain Stable

Commodity currencies show little movement against the dollar. USD/CAD is unchanged at 1.3781, while AUD/USD has slipped 0.1% to 0.6471. Overall, changes are minimal, reflecting the impact of the weak US jobs report as the week begins. Last Friday’s disappointing US jobs report has reset expectations for the weeks ahead. The economy added only 95,000 jobs, far below the forecast of 180,000. As a result, markets are now heavily leaning toward a Federal Reserve rate cut. Fed funds futures currently indicate an over 80% chance of a 25-basis-point cut in September, a big jump from under 40% before the report was released. For currency traders, this suggests a weaker dollar, especially against the euro. It may be wise to use options to prepare for a rise in EUR/USD, such as buying call options with strike prices near 1.1650 or 1.1700 ahead of the September Fed meeting. The large expirations around the current 1.1560 level are keeping the price stable for now, but the overall trend is upward.

Stock Market Response

The stock market is reacting positively to this weak economic news, as lower interest rates tend to benefit equities. The CBOE Volatility Index (VIX), a key measure of market fear, fell from an initial spike to settle around 14, indicating that investors welcome the idea of easier monetary policy. This calm environment is conducive to strategies like selling put options on major indices to earn premium. Looking back at market reactions in 2019, when the Fed first hinted at shifting from holding to cutting rates, the dollar began a multi-month decline. Although USD/JPY is slightly up today at 147.97, this strength is unlikely to last if the Fed implements the anticipated cut. A good strategy could involve buying put options on USD/JPY, anticipating a drop as the US interest rate advantage diminishes. Create your live VT Markets account and start trading now.

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