The upcoming week features important events like the FOMC rate decision and Chair Powell’s press conference. Alongside, three other central banks will meet to announce their policies: The Bank of Canada is expected to lower rates by 25 basis points, while the Bank of England and the Bank of Japan are likely to keep their rates steady. Traders will be looking for clues about future moves.

Key Economic Events

On Monday, traders will track China’s economic data. Retail sales are forecasted to grow by 3.8%, industrial production by 5.7%, and fixed asset investment will also be examined closely. Tuesday brings the UK’s jobs report, which is expected to show the unemployment rate at 4.7% with a focus on wage growth. On the same day, Canada will release its CPI figures and the US will provide retail sales data. On Wednesday, the FOMC meeting is anticipated to announce a 25 basis point rate cut, alongside updated economic projections. The Bank of Canada is also meeting that day, likely to cut rates by 25 basis points. In New Zealand, GDP for Q2 is expected to reveal a decline of -0.3%. Thursday will center around the Bank of England meeting, where the Bank Rate is expected to stay at 4.0%. Traders will look for hints about potential deeper cuts or a slower pace of quantitative tightening. On Friday, the Bank of Japan will hold its meeting, expected to keep rates at 0.5%, and also release UK retail sales data for August. The quad witching phenomenon might cause increased market volatility. As the Federal Reserve prepares to cut rates by 25 basis points next Wednesday, this move may already be factored into the market. This notion is backed by the August jobs report, which showed nonfarm payrolls slightly below expectations at 160,000. Our main focus will be on the updated economic projections and Chair Powell’s tone regarding future directions.

Market Volatility and Strategies

Due to uncertainty surrounding the Fed’s plans, the VIX index has risen to about 18, up from the low teens during the summer. This signals traders to brace for volatility in anticipation of Wednesday’s announcement. Options straddles on the S&P 500 could be a good strategy for capturing significant market moves, regardless of their direction. This situation is reminiscent of the “mid-cycle adjustment” by the Fed in 2019, where a series of rate cuts were made to support a slowing economy. That period resulted in short-term market fluctuations before stocks resumed their upward trend. We’ll closely watch for any signals from Powell indicating whether this is just a temporary adjustment or the beginning of a broader easing cycle. Differences in central bank policies also offer clear opportunities in the currency markets. With the Bank of Canada set to cut rates while the Bank of England holds steady, this environment favors long positions on the British pound against the Canadian dollar. Recent data from the UK shows that wage growth remains strong at over 5.5%, leading the BoE to maintain a conservative stance for now. The Bank of Japan poses an interesting variable; any indication of a future rate hike could lead to a significant strengthening of the yen. This creates a favorable risk-reward situation for buying inexpensive, out-of-the-money put options on the USD/JPY pair—potentially lucrative if the BoJ surprises with a hawkish stance. To round off the week, we have quad witching, when four types of derivative contracts expire simultaneously. This can lead to unusually high trading volumes and potential price fluctuations, especially as Friday’s market close approaches. Historically, we’ve seen volumes on these days rise by more than 30%, amplifying market reactions to central bank news. Create your live VT Markets account and start trading now.

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