In the European session, only a few minor reports, like the final PMIs and the Eurozone PPI data, are scheduled. These will not affect the decisions made by the ECB or BoE, so they won’t change market pricing. In the American session, focus will turn to the US ISM Services PMI, which is predicted to be 51.5, an increase from the previous 50.8. The S&P Global US Services PMI just hit a seven-month high. This improvement is due to rising business activity in the services sector since last December and increasing inflation pressures, especially in services.

Importance Of The ISM Services PMI

The ISM Services PMI has been inconsistent and volatile in the last two years. However, it remains important because the Fed closely monitors this data. With the NFP now released, the market’s attention will be on the prices component rather than employment figures. Comments from Fed officials will also be significant for market pricing. The market has already priced in two interest rate cuts by year-end, starting in September. Over the next few weeks, we can largely ignore European data like the final PMIs. These reports are not expected to influence the European Central Bank or the Bank of England, so we don’t foresee any major trading opportunities in currency or index derivatives. Our main focus will be the US ISM Services PMI. Since the S&P Global US Services PMI has shown a seven-month high, we might see a positive surprise in the ISM report as well. If the reading exceeds the anticipated 51.5, it would indicate strong activity in the services sector. We should closely monitor the “prices paid” component of the ISM report. Inflation remains high, with core PCE around 2.8% through the first half of 2025, which is above the Fed’s target. A high figure for prices paid could challenge expectations for quick rate cuts.

Market Volatility And Trading Strategies

This scenario presents a strong opportunity for volatility plays. The market has fully priced in two rate cuts by the year’s end, starting in September. A strong ISM report could quickly change these expectations, leading to rising bond yields and falling stock prices. In light of this, buying options could be a good strategy to take advantage of potential volatility. Consider purchasing VIX calls or out-of-the-money puts on major indices like the S&P 500 for September expiry. These positions would gain if the market declines and the Fed seems more hawkish. We can also explore options on Secured Overnight Financing Rate (SOFR) futures. If the ISM data is strong, the likelihood of a September cut diminishes, lowering the price of futures contracts. Buying put options on December 2025 SOFR futures would be a direct way to react to a potential shift in Fed policy expectations. Recall how in the first quarter of 2025, a series of strong data releases pushed back rate cut expectations from June to September. A similar situation could happen this month if the services sector shows unexpected strength and inflation. We should listen closely to any comments from Fed officials after the data release. Create your live VT Markets account and start trading now.

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