The Federal Reserve has kept interest rates steady, but two members disagreed, pushing for a 25 basis point rate cut. Chairman Powell indicated that consumer spending is slowing down and private sector job growth is weaker, though he chose a cautious path due to strong economic fundamentals. He highlighted that inflation is still above the 2% target, and the effects of future tariffs remain uncertain. The Fed will review upcoming inflation and employment reports before their next meeting in September. In the currency market, the US dollar gained significantly. The EUR/USD fell below important levels, and the USD/JPY rose, nearing its 200-day average. The GBP/USD remained bearish, while the USD/CHF hit new highs. Both the USDCAD and AUDUSD saw major movements, with the USDCAD rising above crucial levels, indicating a potential bullish turn.

Bank Of Canada And Stock Market

The Bank of Canada kept rates unchanged, pointing out uncertainty in trade policies and inflation. Governor Macklem raised concerns about the long-term effects of tariffs on economic growth. In the stock market, the Dow and S&P experienced slight declines, but the NASDAQ climbed. Companies like Meta and Microsoft exceeded earnings expectations, boosting after-hours trading. Meanwhile, Amazon and Apple awaited their earnings announcements, leading to mixed after-hours activity. Chip stocks thrived due to tech giants’ plans, with Nvidia trading above its all-time high. US debt yields rose, especially at the shorter end, as the chance of a September rate cut decreased. In Q2, GDP exceeded forecasts at 3.0%, partly due to changes in import trends. ADP employment data was better than expected, with attention now turning to the upcoming BLS employment report. Given the Fed’s decision, the market is rapidly adjusting probabilities for a September rate cut, now below 50%. This indicates that short-term interest rate futures may face pressure as traders reverse their bets on a near-term cut. With the 2-year yield jumping over 7 basis points to 3.946%, option strategies that benefit from sideways or mildly rising yields may be appealing in the weeks ahead.

Historic Dissent At The Fed

The unusual dissent at the Fed creates levels of uncertainty not seen in decades. In 2022, aggressive policy changes from the Fed caused the VIX index—used to measure expected market volatility—to often trade above 25. Therefore, buying options or VIX futures could serve as a wise hedge against the potential sharp movements from upcoming data releases. The US dollar is on the rise, with the EUR/USD pair dropping below the critical 1.14475 level. Given that Eurozone inflation is lower than in the US, with the last reading in June 2025 at 2.5% compared to the US PCE at 2.9%, the policy disparity supports a stronger dollar. Traders might want to consider buying puts on the EUR/USD or implementing bearish risk reversals to take advantage of further declines. Meanwhile, the USD/JPY is testing its 200-day moving average, a level it hasn’t surpassed since February 2025. With US 2-year yields at 3.946% and Japanese yields close to zero, the interest rate gap supports this pair. Call options on USD/JPY could be appealing, as a solid break above 149.535 could lead to a quick increase. Powell pointed out ‘chinks in the armor’ of the labor market, making this Friday’s employment report crucial. Last month’s headline figure was lifted by government hiring, a trend that is not sustainable and hides a decline in private sector job growth. This sets the stage for potential volatility, where trading straddles or strangles on indices like the S&P 500 could benefit from significant price shifts in either direction. There is a clear divide in the stock market, with broad indices like the Dow falling while AI-related tech stocks rise after strong earnings from Microsoft and Meta. This suggests that shorting index futures in weaker sectors while holding long call options on chosen stocks like Nvidia might be a smart pairs trade. The strength in chip stocks indicates that the AI capital expenditure cycle is currently overshadowing broader economic concerns. Create your live VT Markets account and start trading now.

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