The dollar has been a bit weak leading up to today’s London fix. Predicting what will happen next is tough due to month-end trading and market movements, which make it hard to see trends from earlier sessions. Fed funds futures show an 84% chance of a 25 basis points rate cut in September and about 54 basis points by the end of the year. This reflects current sentiment ahead of the upcoming FOMC meeting. Meanwhile, US stocks are doing well, especially tech shares, even with Nvidia seeing a drop after its earnings report on Wednesday.

Dollar Drivers and Market Focus

As the week wraps up, there are few reasons affecting the dollar; month-end trading is taking the spotlight. We may get a clearer picture of market positions next week. Attention will soon shift to the US jobs report due on September 5. Barclays notes weak dollar selling signals this month-end, while Credit Agricole expects mild dollar selling toward the month-end fix. Right now, the US dollar is weak, but these unpredictable month-end trades make it tough to rely on current price movements. With an 84% probability of a rate cut in September, the market seems steady for now. Because of this, volatility is low, making it cheaper to buy options and prepare for surprises in next week’s important data.

Implications for Stock Market and Strategy

Everyone is focused on the US jobs report coming out on Friday, September 5. Recent data points, like the Core PCE inflation for July at a cool 2.6%, suggest a slowdown. Predictions for the jobs number are around a modest 175,000. A much lower number could strengthen expectations for a rate cut and negatively impact the dollar, making bearish dollar options a smart choice. Despite the softer dollar, US stocks, especially in tech, are performing well because bad economic news is seen as positive for future interest rates. The VIX, which measures market fear, is around a low level of 14, indicating complacency. This situation is good for strategies that take advantage of premiums, like selling out-of-the-money puts on major indices, betting that the positive momentum will continue. We observed a similar trend back in summer 2019, when the market also anticipated Fed rate cuts amid slowing growth. The dollar fluctuated before weakening, while stocks rose on expectations of easier policies. With about 54 basis points of cuts expected by year-end, considering longer-dated call options on equity indices could be a way to prepare for a potential year-end rally. Create your live VT Markets account and start trading now.

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