The USD showed mixed strength as trading began. It rose 0.09% against the EUR and 0.22% against the JPY but dropped 0.14% against the GBP. After the RBA cut rates by 25 basis points, the AUDUSD fell 0.45%. The US Consumer Price Index (CPI) is expected to rise, with a 0.2% increase forecasted for headline CPI and a 0.3% increase for core CPI. Yearly, headline inflation is projected at 2.8%, with core inflation estimated at 3.0%. The RBA cut rates to 3.60%, highlighting concerns about inflation slowing and the uncertain economic outlook. It predicts core inflation will be at 2.5% by 2027, with GDP growth expected to slow to about 2.0%. Bank of America noted a year-over-year increase of 1.8% in household credit and debit card spending, with a 0.6% rise month-over-month. In comparison, lower-income households experienced a 1.3% wage increase, while higher-income groups saw a rise of 3.2%.

US Small Business Optimism Index

The US small business optimism index rose to 100.3, with improved views on business conditions. However, 21% of businesses listed labor quality as their main concern. Before the CPI data release, US stocks made slight gains, with the Dow up by 32 points, S&P by 4.5 points, and NASDAQ by 25 points. US yields also increased, with the two-year yield at 3.772% and the 10-year at 4.290%. With the US CPI data set to be released today, August 12, 2025, we anticipate heightened market volatility. Current Fed funds futures indicate a 40% chance of a rate hike in September. If core inflation comes in higher than expected, those odds could rise. Traders should be prepared for increased options premiums on major currency pairs and indices ahead of the release. Market sentiment is already tense, evident from the CBOE Volatility Index (VIX) now around 18. This is much higher than the earlier summer levels and reflects uncertainty about the CPI and the Trump-Putin meeting scheduled for August 15. Given the mixed signals from Ukraine, buying protective puts on the S&P 500 might be a smart way to guard against potential geopolitical shocks.

Opportunities and Risk Management

We see a clear opportunity in the EURUSD pair due to disappointing German ZEW survey results. This data indicates a weak European economy, especially as the US seems stronger, creating a noticeable divergence. Selling out-of-the-money EURUSD call options could be an effective strategy to take advantage of potential euro weakness. The Reserve Bank of Australia’s decision to lower its interest rate to 3.60% sends a strong message regarding the Australian dollar. This move intends to stimulate a faltering economy at a time when iron ore prices—a crucial Australian export—have fallen nearly 15% since spring 2025. This supports our bearish outlook on the AUDUSD, making short positions or buying puts appealing. For USDJPY, the main issue is the significant difference between US and Japanese government bond yields. The US 10-year yield remains above 4.25%, while Japanese yields stay near zero, supporting a stronger dollar against the yen. We can create bullish option strategies for this pair but should remain cautious about any sudden global risk aversion that could strengthen the yen. Despite the bullish outlook, we are careful about the US economy’s prospects due to stress among lower-income households. The Bank of America report shows their wage growth slowing to just 1.3%, which could be a warning sign for future consumer spending—a key driver of the economy. This underlying weakness suggests that any long positions in US-focused assets should be managed carefully. Create your live VT Markets account and start trading now.

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