Today, there are no major economic updates from Europe. Instead, traders are responding to last week’s weaker US jobs report. The only significant data being released today is the US NFIB small business optimism index for August, but it is unlikely to have a big impact. European markets are mainly focused on precious metals.

Gold and Silver Surge

Gold is rising and has hit new record highs, increasing by 0.4% to $3,648 today. Silver is also climbing, surpassing $41—a high that hasn’t been seen since 2011. In France, the political scene is shifting as François Bayrou is removed as prime minister after a confidence vote, but the markets remain stable. Japan is facing political changes too, as Shigeru Ishiba resigns after disappointing election results. This led to some initial market fluctuations in the USD/JPY rate, but it has now stabilized at 147.30. The US dollar is under pressure following recent employment data, raising speculation about a possible interest rate cut by the Federal Reserve. Attention is now on Thursday’s US CPI report, which could sway expectations for rate cuts. A weaker inflation report might support calls for aggressive rate cuts, while stronger inflation data could challenge how the Federal Reserve communicates its plans. Traders will be on the lookout for any indirect hints from policymakers. With a quiet data calendar today, we’re gearing up for the US inflation report on Thursday. Last week’s soft jobs report has created a dovish outlook, weakening the dollar and increasing bets on sharp rate cuts by the Federal Reserve. This expectation is driving market sentiment at the moment.

Fed Action Expectations Intensify

The rise in precious metals is significant, with gold nearing fresh record highs around $3,650. Open interest in December gold futures has increased by over 5% in the past week, indicating that new money is supporting this upward trend. Buying call options on gold or silver ETFs is a straightforward way to capitalize on this momentum. Expectations regarding actions by the Federal Reserve are growing stronger, with the dollar losing ground. The CME’s FedWatch Tool shows an 85% likelihood of a rate cut this month, with the chance of a 50 basis point cut climbing to nearly 40%. This makes bearish dollar trades appealing, such as buying puts on a dollar index ETF or calls on the EUR/USD pair. All eyes are on Thursday’s US CPI report, as it could be crucial for deciding on a potential 50 basis point cut. A lower-than-expected inflation figure would fuel market enthusiasm, whereas a high reading could lead to market turmoil since the Fed is currently in its pre-meeting blackout period. To navigate this uncertainty, options strategies like a straddle on the S&P 500 index may be worthwhile if the market moves significantly. In Europe, while the political situation in France seems calm for now, caution is advised. We recall the volatility in French bond yields during the 2017 election period, and unexpected developments can happen anytime. With implied volatility low, purchasing longer-dated puts on the euro can be a smart hedge against possible political risks. The yen is also gaining strength after the Japanese prime minister stepped down and the dollar weakened. The USD/JPY rate falling below 147.50 suggests that the traditionally profitable yen carry trade may become less attractive as US interest rates are expected to decrease. This could signal the beginning of a larger shift, making puts on the USD/JPY pair an intriguing speculative option. Create your live VT Markets account and start trading now.

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