The US Dollar has made small gains against most G10 currencies during the North American session on Friday. This increase is partly due to month-end flows in a market that remains uncertain, affected by a malfunction at the CME. This CME issue has stopped trading and disrupted market liquidity during a holiday weekend, with trading volumes falling to 60-70% of normal levels. Many G10 currencies are slightly losing value, with the EUR and NZD down about 0.4% against the USD. The CAD is mostly stable, down just 0.1%, while the JPY remains unchanged.

Global Market Movements

Global stock markets are relatively stable, while government bonds suggest some risk aversion with slightly lower yields in Europe. The CME outage has also paused trading in commodities and Treasury futures. Investors are focusing on what the Fed might do, with a cut in December anticipated at 20 basis points. Key US reports include ISM manufacturing data on Monday and ADP employment on Wednesday. Next week, the main attention will be on the PCE inflation numbers and the University of Michigan’s sentiment index. No Fed officials will speak, as they are in a communications blackout before the December 10 decision. Recent Fed messages have been dovish, but there is a risk of disagreement within the committee. The current strength of the US dollar appears to come from temporary month-end flows and thin market conditions. The CME outage has impacted liquidity, raising the CBOE Volatility Index (VIX) from a recent average of around 17 to over 19. We view this as a short-term issue, with more significant developments expected in the coming weeks. All attention is now on next week’s Personal Consumption Expenditures (PCE) inflation data, the last major report before the Fed’s December 10 meeting. The Core PCE figure for October was a stubborn 2.8%, making this new release critical to confirming any disinflation trend. A number that is much higher or lower could drastically change market expectations.

Fed Rate Cut Speculation

The Fed funds futures market currently expects about a 20 basis point cut, showing an 80% chance of a quarter-point reduction. This high yet uncertain expectation creates an interesting scenario for options traders, particularly with interest rate derivatives. Any surprise from the PCE data could shift the chances of a cut drastically, swinging between 0% and 100%. We’re worried about potential dissent within the FOMC, even if they go for a dovish decision. This situation resembles 2019, when the Fed cut rates “as insurance” but encountered dissent at each meeting. Any internal disagreement could lead to a hawkish surprise in their policy statement, even with a rate cut. Given this uncertainty, we are exploring strategies that could benefit from a significant market move after the PCE and FOMC announcements. This includes looking at options on Treasury futures, which react directly to rate expectations. Volatility strategies, like straddles on major currency pairs such as EUR/USD, might also be suitable to capture sharp price movements in either direction. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now