In July, US inflation, measured by the Consumer Price Index (CPI), stayed at 2.7% year-over-year, which was lower than the expected 2.8%. The monthly changes were 0.2% for CPI and 0.3% for core CPI, matching predictions.

Annual Core CPI Rise

The annual core CPI increased to 3.1%, up from 2.9% last month and higher than the market forecast of 3%. After this inflation data was released, the US Dollar Index fell by 0.15% to 98.35, with the US Dollar particularly weakening against the Swiss Franc. Analysts had expected an annual inflation rate of 2.8% in July, slightly higher than June’s 2.7%. Core CPI, which excludes food and energy, was also projected to rise by 3% annually, compared to the previous 2.9%. US inflation data can shape the Federal Reserve’s views on interest rates. According to the CME FedWatch Tool, there is a 90% chance that the Fed will cut the policy rate by 25 basis points in September, which could impact the US Dollar’s value. If headline inflation drops to 2.6% or lower, it could raise expectations for rate cuts and further affect the currency. With July’s inflation data behind us, we shift our attention to the Federal Reserve’s meeting in September. Headline inflation remained stable at 2.7%, just below expectations, while core inflation unexpectedly rose to 3.1%. This mixed message creates opportunities, as the market increasingly anticipates a rate cut. We should consider using derivatives to position ourselves for the expected 25 basis point rate cut next month. Current data from the CME FedWatch Tool on August 12, 2025, shows a nearly 90% probability for this move, making long positions in interest rate futures a key strategy. This means betting that interest rates will indeed fall as forecasted.

Stock Market Impact

The expectation of lower rates has already weakened the US Dollar, which fell below the 98.00 mark on the DXY index after last month’s CPI report. Given this trend, buying put options on the dollar or call options on the Swiss Franc seems wise. This strategy will profit if the dollar continues to lose value against other major currencies. For the stock market, lower interest rates typically benefit companies by lowering borrowing costs. Reflecting on the aggressive rate hikes from 2022 to 2023, a potential cut could signal a big policy shift likely to boost equities. We can act on this by purchasing call options on the S&P 500, expecting a market rally leading up to the Fed’s decision. However, the difference between headline and core inflation adds uncertainty to the situation. If we think the Fed’s decision-making will become more heated, we might see increased market swings. To prepare, we could buy call options on the VIX, which would profit from rising market volatility in the weeks ahead. Create your live VT Markets account and start trading now.

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