In just one month, expectations shifted dramatically. The Non-Farm Payroll (NFP) report is now key. Despite the Federal Reserve being in a tight spot from past NFP reactions, this report is essential for predicting future interest rates. Recently, positive US data didn’t change the current outlook for easing. However, market positions today are completely opposite compared to August. Back then, strong July data and a hawkish Federal Open Market Committee (FOMC) decision led the market to expect 35 basis points (bps) of easing, with less than a 50% chance of a September rate cut.

Market Reactions and Trends

At that time, the US dollar rose, while stocks, bonds, and gold fell. When a muted NFP report came out, market attitudes shifted sharply. This led to increased expectations for rate cuts, and the Federal Reserve’s tone became more dovish, especially after Powell’s speech at Jackson Hole. Today, the market predicts 60 bps of easing and a 98% chance of a September rate cut. The dollar is weakening, while stocks, bonds, and gold are climbing. If strong data emerges today, a hawkish shift could happen further down the line, based on current market positions. Data that aligns with predictions would keep trends steady. Weaker data might make the market consider an extra rate cut by year-end or larger cuts in September, affecting overall market movements. The quick shift in market sentiment is striking. We began today, September 5th, 2025, with a 98% chance of a Fed rate cut this month and 60 bps in total cuts by year-end. This is a stark change from early August when the chance of a September cut was below 50%. August’s weak jobs report and the Fed’s comments prompted this dovish turn. However, today’s Non-Farm Payrolls data has changed everything. The report showed that the economy added 275,000 jobs in August, much higher than the expected 170,000, while the unemployment rate stayed low at 3.6%. This strong data challenges the idea of a rapidly slowing economy that many in the market had accepted.

Investment Opportunities Amid Market Shifts

With the dovish outlook meeting a surprisingly strong economic report, a major market turnaround is likely. While the Fed may still feel pressure to go ahead with the September cut, expectations for further cuts in November and December are now likely to drop. This creates immediate opportunities for traders who were ready for this unexpected result. For interest rate markets, this suggests positions that benefit from a hawkish adjustment by year-end. Traders should consider put options on Treasury Note futures or short-term interest rate (STIR) options that bet against the deep cuts previously expected for the fourth quarter. The market was leaning towards one-way dovish trades, and this data challenges that belief. In equity markets, the reaction may be negative as expectations for higher rates weigh on valuations. With the VIX volatility index dipping to a low of 13 just yesterday, protective puts on the S&P 500 and Nasdaq 100 are now appealing. The market’s rally before this report was based on the expectation of imminent and continued rate cuts, a foundation that now seems unstable. The US dollar, which has seen significant selling over the past month, is set for a major bounce. Buying call options on the US dollar index (DXY) or puts on pairs like the EUR/USD offers a direct way to take advantage of this reversal. We witnessed a similar reaction after last month’s weak NFP, and we might see just as strong a snapback now. Create your live VT Markets account and start trading now.

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