Today’s session was quite slow because there weren’t any big data releases or significant news. The Japanese trade negotiator talked about ongoing efforts to reach an agreement on tariffs with the US. Meanwhile, the Bank of England’s Governor Bailey mentioned that the “short US dollar” trade is gaining popularity. These updates did not move the markets since they were already anticipated. Market activity remains low as traders await important news regarding tariffs or interest rates.

Market Anticipations

The US session is expected to be just as quiet, with the US Richmond Fed Manufacturing Index set to be released. This index is known to be volatile but usually does not affect the markets much. Additionally, Fed Chair Powell will speak soon, but he likely won’t comment on monetary policy due to the blackout period. With the market so tranquil, trading strategies that benefit from low volatility seem attractive. The VIX index is currently around 13, well below its average of about 19. This suggests that selling short-term options to earn premiums could be a smart move right now. Bailey’s warning about the crowded short dollar trade is crucial. Recent CFTC data reveals that speculative net short positions on the U.S. dollar are at the highest level in over two years. If this trade unwinds, we could see a sharp increase in currency volatility. Thus, long dollar calls or short euro puts might serve as a low-cost hedge.

Market Inertia Insights

We believe that the market is eagerly waiting for signs about interest rates. However, this waiting period presents an opportunity. The CME FedWatch Tool indicates there’s over a 90% chance of no rate change at the next meeting, which might make traders complacent. Even though Powell’s upcoming speech happens during a blackout, any subtle change in his tone could create a surprising shift, prompting us to look for inexpensive options to prepare for potential surprises. The ongoing but slow trade negotiations highlighted by the Japanese negotiator reinforce our view of market inertia for now. Until we see a clear breakthrough or breakdown, we expect major equity indices to stay range-bound. This makes strategies like iron condors on the S&P 500 appealing, as they profit when the market remains stable within a expected range. Create your live VT Markets account and start trading now.

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