Traders expect the Federal Reserve to cut rates three times by 25 basis points each before the year ends. In Europe, ECB officials shared mixed opinions on inflation and interest rates, hinting at possible rate cuts in future meetings. Additionally, US tariffs could lower Japan’s corporate earnings by up to 3%. In the UK, July showed no growth in GDP, while a BOE survey indicated rising public inflation expectations. France and Germany’s final CPI for August remained at 0.9% and 2.2%, respectively. China surprised analysts with an 8.8% increase in the M2 money supply.

Market Movements and Commodity Prices

In the markets, the USD was strong while the JPY weakened. Most European stocks dropped, and S&P 500 futures fell by 0.1%. US 10-year yields increased slightly to 4.039%. Gold went up by 0.4% to $3,648.62, and WTI crude rose by 1.1% to $63.09. Bitcoin also saw a small gain, rising 0.6% to $115,096. The dollar remained stable despite mixed economic data from the US. The EUR/USD pair stayed unchanged at 1.1727, whereas the USD/JPY rose 0.3% to 147.70. Equity trading was subdued, with the DAX taking a small step back after recent gains.

Diverging Central Bank Policies

Now that markets expect almost 75 basis points of Fed cuts by the end of the year, attention turns to Fed funds futures. The drop in US Core PCE inflation to 2.5%, the lowest since early 2023, supports this outlook. We should consider options to prepare for a possible 50 basis point cut at next week’s meeting; such a surprise would significantly shift market pricing. The European Central Bank is sending mixed signals, creating uncertainty and keeping the euro stable for now. With German inflation at 2.2%, we’re quite a distance from the nearly 4% seen earlier this year, which provides support for ECB doves. This situation suggests that buying volatility through straddles on EUR/USD with expirations after the December meeting could be beneficial, as the pair will eventually break out when a clear policy direction is set. The calm in equities, with S&P 500 futures nearly flat, might be a temporary pause before potential volatility. The VIX index, although still under 20, has risen from summer lows of around 15, indicating that traders are beginning to anticipate more risk. We should consider options on major indices to bet on a volatility spike, as the current subdued atmosphere is unlikely to last through next week’s Fed decision. Gold’s consistent rise above $3,600 signals where bond traders expect real yields to head. This behavior echoes the rally we observed after the 2020 pandemic in a low-rate environment. Using call options on gold futures is a smart, capital-efficient way to stay bullish while the Fed prepares to ease policies. Although the Japanese yen continues to weaken, this trend may soon change against the dollar. This scenario is very different from the aggressive rate hikes seen in 2023 and 2024, which hurt the yen. As the interest rate gap between the US and Japan narrows, we should look at buying put options on USD/JPY to prepare for a movement away from its current level of 147.70. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now