The US dollar started the day lower against key currencies, especially the euro and Swiss franc, ahead of the FOMC rate decision. Stephen Miran, the new FOMC board member, is expected to push for a bigger rate cut than the forecasted 25 basis points. The euro-dollar exchange rate hit its lowest level since 2021, increasing by about 0.40%. The dollar also dropped against the pound and yen. In Europe, central banker Scicluna mentioned that there are no plans for a rate cut in October or December. He advised caution when considering rate cuts without clear reasons. Additionally, French growth is weak but still positive according to ECB’s Villeroy. Economic data from Europe showed mixed results: the UK Average Earnings Index met expectations, but the Claimant Count Change was worse than anticipated. German and Eurozone ZEW Economic Sentiments were better than expected, while Eurozone industrial production slightly missed forecasts.

US Economic Overview

In the US, Treasury Secretary Bessent predicted easing inflation and discussed various economic issues, including the US-China economic relationship and the job market. In premarket trading, US stocks rose with notable increases in Oracle and Tesla shares. The US debt market showed mixed yields, while crude oil, gold, and Bitcoin saw minor changes. Retail sales were expected to show slight growth, while Canada’s CPI was predicted to rise gently. US import prices were likely to decrease, with export prices remaining steady. The dollar is declining as we approach the Federal Reserve’s interest rate decision tomorrow. This is because a new Fed board member is expected to advocate for a larger rate cut than anticipated, which could weaken the dollar further. He has previously supported a bigger cut to benefit US manufacturing. In contrast, the European Central Bank appears cautious about cutting rates, especially after today’s German economic sentiment survey, which exceeded expectations. This follows stubborn Eurozone inflation last month, remaining at 2.4%, while German manufacturing shows signs of recovery. This difference between a proactive Fed and a careful ECB suggests that the EURUSD pair will continue to hold strong. Given this situation, buying call options on EURUSD is a straightforward way to profit from potential dollar weakness. Implied volatility is high ahead of the Fed’s announcement, indicating a chance for a significant price movement. We saw a similar pattern in late 2023 when the market began anticipating Fed cuts, resulting in a prolonged dollar decline.

Impact on Stocks and Options Strategies

The expectation of lower interest rates is also lifting US stocks, creating a favorable risk environment. The S&P 500 has risen over 15% this year, largely due to the expectation of easier monetary policy. Traders might consider using call options on major indices like NASDAQ to take advantage of this ongoing momentum. However, we must also consider the risk that the Fed may only implement the expected 25 basis point cut and signal a more cautious approach going forward. In this case, we would likely see a sharp dollar rally and a decline in stocks. To mitigate this risk, purchasing some out-of-the-money put options on the S&P 500 or EURUSD could be a wise strategy. Create your live VT Markets account and start trading now.

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