During the European morning session, major currencies show little movement, with the dollar staying stable. Traders are holding off on making changes until the US Consumer Price Index (CPI) report is released. In specific currency pairs, USD/JPY has slightly increased to 147.80 but remains between its 100-day and 200-day moving averages, which are 146.00 and 148.70, respectively. Meanwhile, EUR/USD is around 1.1700, influenced by significant option expirations, with no significant changes elsewhere.

Importance Of CPI Report

The upcoming US CPI report is crucial for understanding how the dollar will react, especially concerning inflation and its effects on the Federal Reserve’s policies. If the inflation data indicates that tariffs have raised prices more than expected, this may alter the Fed’s decisions by the end of the year. Currently, traders expect around 68 basis points in rate cuts by year-end, with a 25 basis point cut anticipated next week. This expectation will guide market reactions once the data arrives. The market is quiet as everyone awaits the US CPI report later today. This inflation data is vital as it will influence the Federal Reserve’s interest rate decisions for the remainder of the year. Right now, traders are factoring in about 68 basis points of cuts and see a 25 basis point cut next week as almost certain. If inflation turns out to be higher than expected, it could lead to a stronger dollar. This scenario could result from the tariffs on industrial goods imposed in May 2025, which have already increased some input prices by over 3%, as shown by recent supply chain data. In this case, buying dollar call options or puts on interest rate futures could be a strategy for the market adjusting its rate cut expectations.

USD/JPY And EUR/USD Strategy

On the other hand, if the inflation numbers are in line with or lower than expectations, it would support the outlook for rate cuts and likely weaken the dollar. This situation would make call options on pairs like EUR/USD more appealing, as it suggests the Fed will follow through with its planned cuts to aid the economy. For USD/JPY, we are monitoring the range between the 100-day and 200-day moving averages (146.00 and 148.70). A surprise in inflation could push the pair above 148.70, making short-term call options a good strategy. A weaker inflation report could push the pair back toward 146.00, favoring put options. The EUR/USD is currently around 1.1700, a level affected by large option expirations that will soon expire. A breakout is likely after the CPI data, so preparing for volatility with straddles could be wise if you are unsure about the direction. Otherwise, consider taking a position with simple calls or puts once the data is released. We’ve seen this pattern before, particularly during the volatile months of 2023, when inflation reports caused significant market swings, as everyone tried to predict the Fed’s next moves. History shows that these quiet periods often precede big price movements. Therefore, it’s important to have option strategies ready for the upcoming weeks. Create your live VT Markets account and start trading now.

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