This week, all eyes are on the FOMC meeting as the Fed’s decisions will shape market movements. Traders are expecting a 25 basis point rate cut, with only a 4% chance of a 50 basis point reduction. By year-end, the market anticipates around 69 basis points in rate cuts. The outcome and how the Fed communicates it will affect yields, risk sentiment, the dollar, and assets like gold. Other major central banks will also hold meetings this week. On Wednesday, the Bank of Canada is likely to cut the overnight rate by 25 basis points to 2.50%. Current pricing shows a 90% probability of this outcome. The Bank of England will meet on Thursday and is expected to keep its bank rate steady at 4.00%. On Friday, the Bank of Japan will likely maintain its current rates, looking toward future adjustments.

Fed Meeting and Market Expectations

The Federal Reserve meeting on Wednesday has led the market to fully expect a 25 basis point rate cut. The real focus is on how the Fed communicates its plans for the rest of 2025. This forward guidance, shared in their statement and dot plot, will greatly influence market direction. This expected cut follows the August 2025 CPI report, which showed core inflation easing to a 2.8% annual rate, getting closer to the Fed’s target. The recent jobs report also revealed a slowdown in payroll growth to 150,000, indicating a softening labor market. These data points give the Fed the confidence to continue its easing cycle that started earlier this year. We are noticing implied volatility rise, with the VIX increasing to 17 ahead of Wednesday’s announcement. Traders should consider strategies that might benefit from a decrease in volatility post-announcement, a trend seen during the 2022-2023 tightening cycle. Selling options premium through strategies like short straddles or iron condors on the SPX could be a practical approach for those expecting limited market reaction.

Potential Implications for Currency Markets

The U.S. Dollar Index (DXY) is currently around 104.50 and is very responsive to any hawkish surprises. If the Fed indicates fewer cuts than the nearly 70 basis points the market is expecting, the dollar could surge. On the other hand, a dovish message could weaken the dollar and boost gold prices, currently at about $2,400 per ounce, towards new highs. We should also closely monitor the Bank of Canada on Wednesday, where a 25 basis point cut seems certain. However, with Canada’s Q2 2025 GDP growth at a modest 0.5%, the Bank of Canada’s statement might be more cautious than the Fed’s. This situation could provide chances to bet on the Canadian dollar weakening against the U.S. dollar using futures or options on the USDCAD pair. The Bank of Japan on Friday presents a stark contrast, planning to keep rates steady while looking for a future rate hike opportunity. This growing difference in policies makes long yen positions against currencies with easing banks, like the Canadian dollar (CAD/JPY), a compelling medium-term strategy. Meanwhile, the Bank of England is expected to hold rates at 4.00% on Thursday, providing stability but little incentive for immediate pound trading. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now