Goldman Sachs expects the Federal Reserve to start lowering interest rates in September, predicting three consecutive cuts of 25 basis points each by the end of the year. This forecast is based on the hope that inflation stays stable and does not rise again. The bank believes that if inflation continues on its current path, we may see a gradual change in policy. This outlook suggests that markets are becoming more optimistic. If inflation expectations remain in check, short-term yields could drop even more. This would be positive for riskier investments, especially in areas like technology and real estate. Additionally, the dollar might weaken, benefiting gold and emerging market assets from the Fed’s friendly approach.

Derivative Strategy For Falling Yields

Given the anticipated rate cuts, we have a chance to profit from falling yields by using derivatives, such as taking long positions in Secured Overnight Financing Rate (SOFR) futures. The CME FedWatch Tool shows a market-implied chance of over 60% for a rate cut at the September meeting, reinforcing this strategy. It allows us to bet directly on the expected change in monetary policy. We think buying call options on interest-sensitive sectors, especially technology and real estate ETFs, is a smart way to gain upside. The latest Consumer Price Index report for May showed inflation cooling to a 3.3% annual rate, supporting the case for easing that would benefit these investments. Historically, the start of easing periods, like in 2019, has been a key driver for growth stocks.

Options And Currency Strategies

The CBOE Volatility Index (VIX) recently traded near a low of about 13, making options relatively inexpensive. This situation creates a great opportunity to build long-term bullish positions or buy protective puts at a lower cost. It lets us set up trades with clear risk ahead of the expected central bank shift. To take advantage of a possibly weaker U.S. dollar, we are looking into put options on dollar index ETFs or call options on gold. A more accommodating policy tends to reduce the dollar’s appeal, benefiting commodities priced in dollars. After the Federal Reserve started its last easing cycle in mid-2019, gold prices rose by over 20%. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now