Morgan Stanley has updated its predictions for the Federal Reserve, now expecting a rate cut in September, aligning with other analysts. They foresee additional cuts in December and 25 basis point reductions every quarter until 2026, aiming for a target rate of 2.75–3.0%. This marks a change from their previous outlook, which anticipated no adjustments until March 2026, followed by a more aggressive easing strategy. The new forecast supports the growing expectation of Federal Reserve easing, which could affect both the dollar and stocks.

Powell’s Comments from Jackson Hole

The change in perspective follows comments made by Powell at Jackson Hole. He emphasized risks in the labor market instead of earlier worries about persistent inflation and robust employment. Now, with a September rate cut considered very likely, we can expect significant changes in short-term interest rate futures. The CME’s FedWatch Tool indicates an over 85% chance of a 25-basis-point cut at the September 18th meeting, a sharp increase from just 40% a month ago. Traders might want to prepare for lower rates using instruments like SOFR futures as the market adjusts to this more cautious timeline. Anticipating lower borrowing costs provides favorable conditions for stocks, particularly in technology and growth sectors. We could consider buying call options on major indices like the S&P 500 or Nasdaq 100 to take advantage of this potential growth. The CBOE Volatility Index (VIX) has already fallen below 14, indicating increasing market confidence as it prices in a more stable economic outlook.

Currency Trading Strategies

The expectation of a weaker dollar should shape our currency trading strategies. With U.S. interest rates expected to decline sooner and more sharply than before, the dollar’s yield advantage is decreasing. This makes holding long positions in currencies such as the euro or the British pound against the dollar appealing, potentially through options on the EUR/USD or GBP/USD pairs. This outlook is further supported by recent economic data, giving the Fed justification for this shift. The July 2025 job report revealed a slowdown, with only 95,000 nonfarm payroll jobs added and the unemployment rate rising to 4.2%. Additionally, the latest Consumer Price Index (CPI) showed inflation at 2.8%, staying below 3% for three consecutive months. In the fixed-income market, falling rates lead to rising bond prices. We expect Treasury yields to keep decreasing, making long positions in Treasury futures or call options on bond ETFs like TLT potentially profitable. This situation feels reminiscent of 2019 when the Fed transitioned from raising rates to cutting them, which helped raise both bond and stock prices. Create your live VT Markets account and start trading now.

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