Lael Brainard, a former Federal Reserve Governor, warned that Trump’s policies might increase the chances of higher inflation and long-term interest rates. She emphasized the importance of the Federal Reserve’s independence for both the markets and the economy. The Federal Reserve is likely to lower rates by 25 basis points during its September meeting. Trump’s plan for a 15-20% minimum tariff on all EU goods has contributed to the euro’s decline against the US dollar.

US Durable Goods Data

In July, US durable goods showed a decrease of -2.8%, which is better than the expected -4.0%. Commerce Secretary Lutnick stated that the Trump administration is not looking to provide financial aid. At the start of the trading day, the USD weakened amid ongoing market volatility. European markets are experiencing limited movement due to a lack of new developments, as reported by InvestingLive. There is a significant gap between market expectations and potential political realities. The futures market currently predicts over an 80% chance of a 25-basis-point rate cut in September. However, the most recent Core PCE data for July 2025 showed an increase to 2.9%, making an immediate rate cut less likely if inflation concerns persist. The proposed 15-20% minimum tariff on EU goods directly impacts the euro’s value. We have already seen the EUR/USD exchange rate drop below 1.07 this week following this news. Derivative traders might explore buying puts on EUR/USD or selling call spreads in anticipation of further declines if trade war tensions escalate.

Policy Uncertainty and Market Volatility

This period of policy uncertainty suggests that market volatility may increase in the coming weeks. Recall how the VIX index, now around 14, surged above 20 during the trade disputes in 2019. Purchasing call options on the VIX or VIX futures could serve as a smart hedge against an unexpected Fed decision or significant political turmoil. The mixed signals make options on SOFR futures particularly intriguing ahead of the September meeting. With the 2s10s yield curve flattening by another 10 basis points this month to just 15 basis points, uncertainty is rising. A long straddle—buying both a call and a put—could be profitable if the Fed keeps rates steady due to inflation concerns or cuts more aggressively than the anticipated 25 basis points. Create your live VT Markets account and start trading now.

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