The Federal Reserve announced a cut in interest rates of 25 basis points, which was expected. Growth estimates for September have been updated, and two more rate cuts are projected for 2025. In his remarks, Fed Chair Powell pointed out slowing GDP growth and potential risks in the labor market. The Bank of Canada also lowered rates by 25 basis points. Meanwhile, the Atlanta Fed maintained its economic forecasts at a growth estimate of 3.4%, while housing starts in the US for August were below expectations, coming in at 1.307 million. Market reactions saw the S&P 500 decline by 0.1%, WTI crude oil prices dropping by $0.50 to $64.04, and US 10-year Treasury yields rising by 5.4 basis points to 4.08%. Gold prices fell by $32 to $3,657. In the currency market, the USD gained strength while the EUR weakened. At first, markets viewed the Fed’s announcement as dovish due to the anticipated rate cuts, but opinions changed during Powell’s press conference.

The USDJPY Pair

The USD/JPY pair showed some movement, starting at 146.25, dropping to 145.50, then peaking at 147.02. The market is forecasting 43.7 basis points in easing by the end of the year, but December’s meeting remains uncertain. Historically, once the Fed starts cutting rates, that trend usually continues. We should be ready for increased market volatility in the coming weeks. Powell’s mention of “risk management,” along with a divided Fed vote, indicates that future policy is uncertain, which can lead to market swings. Looking at options on the VIX index could help protect against sharp moves, especially since it has shown sustained increases after initial Fed cuts, like in July 2019. The dollar’s rise after a rate cut signals a positive view of the US economy compared to others. The Bank of Canada’s simultaneous cut and cautious comments from the ECB highlight this difference in monetary policy. We should consider call options on the dollar, as the interest rate gap between US and German 2-year bonds has widened to over 150 basis points this year, a trend we expect to continue. The equity market seems to lack clear direction, with the S&P 500 ending the day flat after a bumpy session. This indicates that while a significant crash is not likely, any rally might be slow until the Fed provides more clarity. Strategies like selling iron condors on the SPX index could work well in a sideways market over the next few weeks.

The Rise in 10-Year Yield

The increase in the 10-year yield to 4.08% is a key indicator, as the bond market questions the Fed’s optimistic outlook. The latest inflation data from August indicated that it remained high at 3.6%, leading traders to believe a strong economy will prevent the additional cuts expected this year. We might look at put options on bond ETFs like TLT, anticipating that yields will stay steady or rise. Gold’s significant drop to $3,657 highlights its vulnerability to a strong dollar and rising real interest rates, making it less appealing to hold a non-yielding asset. Historically, when the US Dollar Index (DXY) surpasses important levels and real yields are positive, gold struggles. In the short term, buying protective puts on gold futures or related ETFs may be a wise approach. Create your live VT Markets account and start trading now.

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