The US dollar dropped on Friday after Fed Chair Powell made dovish comments. This caused stock prices to rise and gold to gain value. Treasury yields also fell, marking a change in market trends as the week ended. Right now, the dollar is stabilizing but having trouble reaching new lows. The EUR/USD is close to 1.1700, impacted by large options expirations. Meanwhile, USD/JPY has slightly recovered to 147.30, after reaching a peak of 147.52 but facing resistance at the 200-hour moving average.

Market Activity Levels

US futures have settled down after Friday’s gains. S&P 500 futures are down by 0.1%. Trading has been quieter due to the summer bank holiday in the UK, as markets take a pause before Wall Street kicks back into gear. Fed funds futures show an 87% chance of a 25 basis points rate cut. Even with this high probability, markets are cautious and aren’t fully committing to a September cut until the US jobs report on September 5 provides more information. After last week’s dovish signals from the Fed, the market is in a pause, which is common on a slow Monday. With the 87% probability of a rate cut for September already priced in, it seems like the best approach is to short the dollar and invest in equities. However, this high probability also leaves the market open to surprises. The upcoming US jobs report on September 5 is crucial. Initial jobless claims have edged up slightly over the past month, averaging around 230,000, indicating a cooling labor market and supporting the case for a Fed rate cut. If the jobs report shows significantly stronger numbers, it could lead to sharp changes in the market and elevate the dollar.

Investment Strategies

Given the current situation, implied volatility seems low, with the VIX index around 13.5. This suggests that the market is not very sensitive ahead of the major data release that could influence Fed policy. For derivative traders, this represents an opportunity to buy volatility at a low price. One simple strategy is to consider options on major stock indices that expire shortly after the jobs report. A long straddle or strangle on the S&P 500 could profit from significant movement in either direction, regardless of whether the data is unexpectedly strong or weak. This approach isn’t about predicting direction but betting that the current market calm will change. The dollar also remains a key focus, showing signs of weakness. This is supported by recent Core CPI data, which at a 3.1% annual rate is the lowest since early 2024. A contrarian strategy could involve buying inexpensive out-of-the-money call options on the US dollar. This could yield benefits if the jobs report surprises and leads the market to reconsider the likelihood of a rate cut. We remember how volatile markets were in late 2023 when payroll data frequently challenged the belief in a Fed pivot. At that time, one jobs report could shift rate expectations by 20-30 basis points in just one day. The current scenario feels similar, with a strong consensus based on data that is still inconclusive. Create your live VT Markets account and start trading now.

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