During the European session, we expect some lower-impact economic data, specifically the final CPI readings for France and Spain. The European Central Bank (ECB) is currently on hold after its last rate change, and no adjustments are expected unless something significant happens. Today, we will hear from several ECB speakers, which is typical after a rate decision. In the American session, the focus will be on the University of Michigan Consumer Sentiment report. It’s expected to drop slightly from 58.2 to 58.0. We will also pay attention to inflation expectations, but unless there are surprises, this data is unlikely to lead to any changes.

FOMC Decision Anticipation

Looking ahead, the FOMC decision will be closely watched, especially for any hints of a possible 50 basis point cut. Keep an eye on insights from WSJ’s Timiraos about this. With little on the schedule today, it’s a good time to prepare for next week’s important FOMC decision. The University of Michigan sentiment report is only significant if it shows a major change. A much lower reading could reinforce the case for a Federal Reserve rate cut. Consumer sentiment has been stuck at levels similar to those in 2022, indicating ongoing economic weakness. As we approach this major event, we believe implied volatility is currently underestimated. For example, the VIX index has been around 17 but may easily rise above 20 when the Fed announces its decision—a trend seen before significant policy changes. This makes buying options, like straddles or strangles on indices such as the SPX, an appealing strategy to anticipate increased market movement, no matter the direction. The possibility of a 50 basis point cut creates a strong dovish outlook in the market. Traders are already positioning themselves by buying out-of-the-money call options on rate-sensitive sectors and major indices. Recent economic data, like the August jobs report showing unemployment rising to 4.2%, supports the idea that the Fed needs to take stronger action to help the economy.

Market Reaction to Potential Fed Actions

However, we must also think about the risk of a “hawkish disappointment.” If the Fed decides to cut by only 25 basis points or hints at a pause, we could see a sharp negative reaction in the market, given current dovish expectations. Smart traders might consider buying protective put options or setting up put spreads on the QQQ to hedge against this scenario. In contrast, the ECB’s steady stance suggests we expect less volatility in European assets for now. Recent final inflation figures for Spain showed core CPI steady at 2.5%, giving the ECB little reason to change its course. Therefore, in the upcoming weeks, the best trading opportunities will likely come from positioning around the Fed’s decisions rather than Europe’s inaction. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now