Today’s agenda is light, with few releases during the European session. We will see Eurozone Retail Sales and Construction PMIs, but they are not expected to significantly affect the European Central Bank or the markets. In the American session, the only focus will be on the Canadian PMIs. The main event might be Fed’s Cook speaking about the “US and global economy” online. This speech could hint at a rate cut in September.

Market Responses To Fed Speeches

Fed officials Williams and Daly have hinted at a possible rate cut in September. The market has been reacting to this since the recent Non-Farm Payroll figures came in weaker than expected. With the market anticipating a September rate cut, the easy trades are mostly gone. Currently, Fed funds futures show over a 90% chance of a 25-basis-point cut next month. Our focus should be on whether there will be a surprise regarding the size or timing of this cut. This expectation was solidified after the July Non-Farm Payrolls report showed just 155,000 new jobs, falling short of the 210,000 forecast. The unemployment rate also rose to 4.1%, providing dovish Fed members with the data they need. Any shift from this narrative at the September meeting could lead to significant market movements. In the weeks ahead, traders may want to buy volatility ahead of the September FOMC meeting. In early 2019, we saw the VIX index rise from around 12 to over 19 leading up to the first rate cut. Purchasing straddles or strangles on major indices like the S&P 500 could be profitable if there’s a larger-than-expected move.

Strategies For Traders Amid Rate Cuts

Consider options on SOFR futures for a more direct bet on interest rates. Although the September cut is largely priced in, there’s more uncertainty about the direction for the rest of 2025 and early 2026. Buying call spreads on SOFR futures could be a cost-effective way to bet that the Fed may signal more aggressive cuts than expected. A dovish Fed typically weakens the U.S. dollar. Historically, the Dollar Index (DXY) has dipped in the months following the start of a cutting cycle. Traders can capitalize on this by buying call options on currency pairs like EUR/USD, which benefit from a weaker dollar. Create your live VT Markets account and start trading now.

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