The European morning was mostly quiet as everyone waited for the US CPI report. The Reserve Bank of Australia lowered interest rates by 25 basis points, with another possible cut expected in September. Markets believe there might be an additional cut by the end of the year. The UK’s employment report matched expectations. However, government and private reports showed different results. Wage growth slowed, but this did not change predictions for interest rates, with a cut anticipated in February 2026. Market activity stayed steady with small gains for the dollar.

Market Awaits US CPI Report

Currency markets are focused on the upcoming US CPI report, the last major event this month before the Jackson Hole Symposium. At this event, the Fed might discuss potential rate cuts. Current sentiment heading into the September FOMC meeting seems to lean toward a cut, depending on CPI results. The main event today is the US CPI report. The dollar is gaining strength, indicating traders may be buying protection against unexpected high inflation. This tension makes options that protect against sudden market shifts, like puts on bond futures or calls on the dollar, more costly. If inflation comes in hotter than expected, it could drastically change the outlook for a September interest rate cut by the Fed. Right now, Fed Funds futures suggest there is a 65% chance of a cut next month, a notable change in recent weeks. A CPI that exceeds expectations could drop that probability sharply, resulting in increased short-term interest rate volatility.

Impact on Australian and UK Economies

With the Reserve Bank of Australia lowering its cash rate to 3.60% and hinting at more cuts, the Australian dollar is likely to weaken. Following the RBA meeting, the AUD/USD pair struggled, and Thursday’s employment report will be critical. Traders may look to buy AUD/USD put options if signs of a weakening labor market appear. On the other hand, the UK is taking a much slower approach to easing. Markets do not expect a Bank of England rate cut until December 2025. This widening gap in policy between the RBA and the BoE may encourage strategies that bet on the strength of the pound against the Australian dollar. Additionally, the weak German ZEW survey adds to the negative outlook for the Eurozone, making the dollar more appealing. Looking ahead, the Jackson Hole Symposium at the end of August is the next significant risk event. The market still remembers the sharp decline after Chairman Powell’s hawkish speech in August 2022, reminding us how this event can shift expectations. It’s wise to hold some volatility protection, perhaps through VIX options, until the end of the month. Create your live VT Markets account and start trading now.

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