The USD fell initially after weaker inflation data from the U.S. Producer Price Index (PPI), but it quickly bounced back as selling pressure eased. Although inflation is still above the 2% target, it has dropped below 3%, giving the Federal Reserve more reason to think about cutting interest rates. Treasury yields went down, especially for shorter durations. The 2-year yield is now at 3.533%, down 0.9 basis points, while the 10-year yield decreased by 0.4 basis points to 4.0703%. Last week, the 2-year yield was at 3.466%. With the Fed funds target set at 4.50%, the market is showing signs of expecting rate cuts.

Mortgage Rate Trends

Mortgage data is looking good for borrowers, with the average 30-year fixed rate dropping to 6.49% from 6.64%. This led to a 9.2% rise in applications. U.S. stock indices also saw gains: the Dow rose by 8 points, NASDAQ climbed by 115 points, and the S&P added 31 points. In currency movements, the EURUSD pair briefly exceeded the 100-hour moving average but then pulled back. It is currently focused on the 200-hour moving average at 1.16918. The USDJPY hit a low of 147.08 before recovering but remains within a volatile trading range established since early August. The weaker Producer Price Index data supports the ongoing trend of decreasing inflation. This perspective has gained strength following last week’s August 2025 CPI report, which showed headline inflation at 2.8%, marking the second month in a row below 3%. As a result, derivatives markets are now predicting over a 70% chance of a 25-basis-point rate cut at the Federal Reserve’s meeting in November.

Options Strategy

With the 2-year Treasury yield significantly below the current Fed funds rate, options strategies that gain from falling short-term rates are appealing. We might look into buying call options on short-term bond ETFs, a strategy that worked well during last year’s market changes in late 2023. The goal is to prepare for the Fed’s easing cycle before the broader market fully accounts for it. The recent surge in tech stocks, especially in semiconductors, indicates renewed interest in growth assets as borrowing costs are anticipated to decline. Given the Nasdaq’s recent rise above its 50-day moving average, traders should consider buying call options on the QQQ ETF or on leading chip stocks to take advantage of this trend. This is supported by strong fundamentals, as seen in Oracle’s impressive earnings report just yesterday. Despite a softer outlook from the Fed, the rebound of the US dollar suggests being cautious about shorting the currency. The EURUSD pair’s inability to maintain gains above the 100-hour moving average points to underlying dollar strength, likely because the European Central Bank is expected to ease even more aggressively. Selling out-of-the-money call spreads on EURUSD could be a way to profit if the pair stays below the 1.1742 resistance level. The USDJPY pair is currently stuck in a range with low directional conviction. Although the price is below significant moving averages, which suggests a bearish trend, sellers haven’t managed to decisively break below the 147.00 support level. This situation resembles the volatile conditions in 2024 before the Bank of Japan made its key policy changes, so traders might consider using strangles or straddles to prepare for a volatility breakout in the upcoming weeks. Create your live VT Markets account and start trading now.

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