This week promises to be eventful for the markets. The US and China are meeting for trade talks, which raises hopes for keeping their temporary truce. On Tuesday, the JOLTS report will come out, providing insight into the upcoming US jobs data ahead of the non-farm payrolls report. On Wednesday, Australia will release its quarterly CPI report for Q2. Many expect the RBA to consider a 25 bps rate cut in August, with current odds around 84%.

Key Monetary Decisions

Later in the week, we will see the ADP employment figures and US Q2 GDP data. The Bank of Canada and the Federal Reserve will also announce their monetary policy decisions. Big tech companies will report earnings, with Meta and Microsoft releasing their results on Wednesday, followed by Amazon and Apple on Thursday. Thursday will also feature the Bank of Japan’s monetary policy decision, along with the US PCE price index and initial jobless claims. We will also see preliminary inflation data for July from several European countries, leading up to the Eurozone estimate on Friday. This data could impact the ECB’s decisions in September. The week will end with the US labor market report and updates on trade ahead of the August 1 deadline, along with month-end trading flows, which may complicate market analysis. With so many important events occurring this week, we believe volatility is underestimated. This scenario suggests buying options, like puts on the S&P 500, could be a smart way to protect against unexpected outcomes from key data releases. The CBOE Volatility Index (VIX), often referred to as the market’s “fear gauge,” has risen above 14, up from around 12 earlier this month, indicating growing market anxiety.

Federal Reserve Policy Impact

We should expect significant price movements following the Federal Reserve’s policy announcement, particularly based on signals from Chairman Powell regarding future policies. The CME FedWatch Tool indicates a 99% chance that rates will remain unchanged, but any suggestion of a more aggressive stance could shake up the markets. Traders might use straddles on index ETFs like SPY to get ready for big moves after his press conference. Earnings from major tech companies will be crucial, as these stocks have fueled recent market gains. The options market is anticipating a post-earnings move of over 4% for Microsoft and more than 7% for Meta. Selling premiums through strategies like short strangles or iron condors could be profitable if we think the actual market reactions will be less volatile than what’s currently expected. For currency traders, the Australian inflation report is important, especially with an interest rate cut likely on the horizon. Historically, the AUD/USD pair has dropped significantly after rate cuts, including a decline of over 0.7% just hours after the unexpected RBA decision in May 2023. We find value in buying put options on the Australian dollar to benefit from a potentially dovish outcome. The week will wrap up with the US labor market report, which will significantly affect the dollar and bond yields. If the non-farm payroll number strays far from the consensus forecast of 184,000, it could easily trigger a rapid move of over 1% in the U.S. Dollar Index (DXY). Using short-dated currency options provides a direct way to trade this critical event. Create your live VT Markets account and start trading now.

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