In the upcoming European session, important economic reports will be released, including the Spanish Preliminary CPI, German Flash Q2 GDP, Italian Advance Q2 GDP, and the Eurozone Flash Q2 GDP. These numbers are unlikely to impact the ECB’s monetary policy, as they are waiting for more data before making any decisions on interest rates. The ECB seems to have finished its cycle of rate cuts, and rate hikes might happen in 2026 if the economy continues to improve. In the American session, the focus will shift to the US ADP and US Q2 Advance GDP reports. The US ADP figure is expected to be 75K, rebounding from a previous negative -33K, which affected rate expectations.

Focus On The FOMC Decision

The US Q2 GDP is projected to be 2.4%, bouncing back from -0.5%. While this is a lagging indicator, all eyes are on the FOMC decision later today. The Bank of Canada is likely to keep interest rates steady, backed by strong job data and inflation within their target. The market anticipates a 16 bps rate cut by year-end, indicating uncertainty over future cuts. The FOMC is also likely to maintain steady rates. Some members might disagree, and Fed Chair Powell could suggest a potential rate cut based on upcoming employment and inflation data. Currently, the market sees a 67% chance of a cut in September and a 95% chance by December. In Europe, the European Central Bank appears to be done with rate cuts for now. Recent flash estimates show Eurozone inflation at 2.6%, slightly above target, giving the ECB little reason to ease further. Traders should be aware that discussions might shift towards maintaining rates or even increases in 2026, marking a big change from recent trends. In the United States, the focus is shifting from today’s past data to the Federal Reserve’s plans. The advance Q2 GDP report is expected to reveal a recovery to 2.4% growth, a significant improvement from the -0.5% contraction in Q1. However, traders will likely overlook this as the FOMC’s policy decision is the highlight of the day.

Market Expectations And Trader Strategy

For traders, a key factor is the market’s strong pricing for Fed rate cuts, with CME’s FedWatch tool showing a 67% likelihood of a cut by the September meeting. This creates a potential for volatility, similar to 2019 when market expectations for cuts outpaced the Fed’s actual comments. If Fed Chair Powell hints that the data does not support a September cut, it could lead to sharp adjustments in interest rate futures. Since a dovish outcome is largely expected, a smart strategy could involve positioning for a hawkish surprise. This might include using options to bet on increased volatility in short-term bonds or a scenario where rates do not drop as fast as expected. If Powell emphasizes the data and points to a robust labor market, the market’s strong belief in a September cut could be challenged. In contrast, the Bank of Canada is in a strong position and is expected to hold its interest rates steady. Recent data revealed that Canada added a solid 45,000 jobs, and core inflation remains steady near the BoC’s target at 2.8%. This strong economic environment means the BoC feels little pressure to signal any rate cuts. The difference between a Fed that may cut rates and a BoC that is holding steady provides a strong case for a stronger Canadian dollar against the US dollar. Derivative traders can explore options on the USDCAD pair, anticipating a decline in the coming weeks. The clear contrast in central bank policies offers a solid reason for this trade. Create your live VT Markets account and start trading now.

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