In September, the University of Michigan reported that the expected consumer inflation in the United States over the next five years is 3.7%. This is slightly below the forecast of 3.9%. The publication stressed the risks of investing, highlighting that there is a chance of losing your entire investment. It emphasized the importance of thorough research before making any investment decisions.

Foreign Exchange Trading Risks

The article warned that trading foreign exchange on margin carries high risks due to leverage. It pointed out that there are possibilities for both profit and loss, and advised caution for traders. When making trading decisions, consider your risk tolerance and investment goals. The article recommended consulting an independent financial adviser if you have any questions about your investments. Readers were reminded that the information shared is meant for general market commentary. FXStreet stated that it is not responsible for any errors or omissions, and that the investment advice given is not personalized. With the consumer inflation expectation now at 3.7%, lower than expected, discussions about the Federal Reserve cutting interest rates are increasing. This follows the August PCE inflation report, which also suggested easing price pressures. After dealing with persistent inflation throughout 2023 and 2024, this new trend supports the idea that the Fed can loosen its policies.

Interest Rate Derivatives and Investment Strategy

We should consider interest rate derivatives to prepare for this shift in policy in the coming weeks. The SOFR futures market already shows a higher likelihood of a rate cut by the end of the year. According to the CME FedWatch Tool, traders now see over a 70% chance of a cut before the December meeting, a significant rise from a month ago. This situation is putting pressure on the US Dollar, making foreign currency options more appealing. With the implied volatility in the EUR/USD pair remaining under 7% for much of the last quarter, buying call options could be a smart move. This would allow us to benefit from potential gains towards the 1.1700 level while managing risk. Gold is also attracting attention since it gains from lower real yields and a weaker dollar. As gold reaches nearly $3,800 an ounce, we are considering call options on gold futures to leverage the upward trend. Historically, periods when the Fed eases have been favorable for precious metals, like the cycle that started in 2019. Lastly, the expectation of a more supportive Fed should ease market tensions, reducing equity volatility. We might explore strategies that profit from a decrease in the VIX, which has been averaging around 16 in recent months. One approach is selling out-of-the-money call spreads on VIX futures, reflecting the belief that a major market shock is unlikely as the Fed shifts to a cutting approach. Create your live VT Markets account and start trading now.

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