The US Dollar (USD) is showing mixed strength as investors deal with various issues influenced by recent events. A meeting between Trump and Xi resulted in a year-long truce. The US will reduce some tariffs, while China will lift restrictions on rare earth exports. Even with these positive discussions, stock market sentiment is less optimistic due to cautious comments from the Federal Reserve about rate cuts and mixed earnings reports in the tech sector. The Euro (EUR) is doing moderately well as the European Central Bank (ECB) prepares for its policy decision, backed by strong growth data from the Eurozone. In contrast, the Japanese Yen (JPY) is lagging after the Bank of Japan decided to keep its policy unchanged.

Federal Reserve’s Mixed Outlook

The Federal Reserve is expected to cut rates by 25 basis points and plans to stop reducing its balance sheet by December. There are differing views within the Fed, showing a split among officials regarding future rate cuts. Chair Powell highlighted the uncertainty around further cuts, countering the expectation of easing in December. Though more rate cuts seem possible, when they will happen is still unclear. Market swaps indicate a cautious outlook, with the chances of a December cut falling to about 70%. Slightly higher yields are supporting the USD, but expected rate cuts might limit any significant gains. Given the division within the Federal Reserve, we should expect increased volatility in the coming weeks. Powell’s push against a December rate cut has added uncertainty, shown by the CBOE Volatility Index (VIX) rising over 15% to near 22. This situation suggests it’s a good time to buy options on equity indices to profit from major price moves in either direction.

Opportunities in Forex Markets

The market’s indifferent reaction to the US-China trade truce suggests caution regarding risk assets. Remember how a similar G20 truce in 2018 led to further conflicts, causing skepticism among traders. So, using any strength in equities as a chance to buy protective put options or to take bearish positions in key industrial stocks is wise. Divergence among central banks presents clear opportunities in the forex market. Recent Eurostat data shows Eurozone GDP grew unexpectedly strong at 0.5% in Q3, which might encourage the ECB to adopt a more hawkish stance, bolstering the Euro. This stands in sharp contrast to the Bank of Japan’s continued dovishness, making long EUR/JPY futures or call options attractive. The mixed signals from the Fed, with one official pushing for a 50 basis point cut while another advocated for no cuts, likely reflect ongoing inflation pressures. The latest report from the Bureau of Labor Statistics, dated October 15, 2025, shows core CPI stubbornly high at 3.2%, complicating future rate-cut plans. This suggests that interest rate futures for early 2026 may be too optimistic about potential rate cuts, prompting traders to consider positions that benefit from rates remaining high for a longer period. Overall, the drop in likelihood of a December rate cut to 70% indicates the market is reassessing the Fed’s future actions. This uncertainty is driving up demand for options on major currency pairs like EUR/USD and USD/JPY. Traders seem to be gearing up for significant price movements rather than clear trends, favoring strategies that benefit from increased volatility. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now