The European morning was calm, with few data releases. The main focus was on the UK’s employment report and Germany’s ZEW survey. While the ZEW survey fell short of expectations, it did provide a hopeful outlook for the future.

ECB and US Treasury Statements

ECB officials confirmed they will not change interest rates without strong reasons. The US Treasury Secretary shared optimistic comments about US-China relations and tariff matters. The US dollar weakened again, especially against the Euro and Swiss Franc, due to stable CPI data and inconsistent jobless claims. Recent jobless claims were affected by fraudulent filings in Texas and may be revised downwards. The Core PCE for August is expected to rise by 0.2%, keeping the yearly rate at 2.9%. Weak job reports have fueled expectations for a dovish Fed, suggesting they will not go beyond market predictions. This dovish outlook helped risk assets, pushing US indices to new highs and allowing gold to continue to rise. The American session will include Canadian CPI and US Retail Sales data.

Market Impact and Predictions

The ongoing weakness of the US dollar signals changes in the upcoming weeks, especially with the FOMC meeting tomorrow. The market is anticipating a dovish Fed, driving the Dollar Index (DXY) down to below 101.50, which is a drop of over 2.5% this month. This trend suggests that building positions against the dollar, especially with options on currencies like the euro and Swiss franc, remains a smart strategy. Since many expect a dovish tone, the main risk lies in a surprise from the Fed that is not as dovish as anticipated. We remember the strong dollar rally after the Fed was less accommodating than many traders expected in spring 2024. Therefore, using options to buy volatility on major pairs like EUR/USD before the announcement could be a wise trading move to prepare for any potential surprises. Risk assets are indeed thriving in this environment, with the S&P 500 breaking above 5,800 for the first time. Low volatility, shown by the VIX trading below 13, makes protective puts quite affordable. Holding long positions in stocks through call options, while hedging with some downside protection, seems like a sensible way to guard against any hawkish surprises. Gold’s surge to a new all-time high, surpassing $2,600 per ounce, is largely due to the weak dollar and expectations of lower real interest rates. This upward momentum will likely continue as long as the idea of a dovish Fed remains strong. Traders may consider call spreads on gold futures to capitalize on further gains while managing their risk at these historically high prices. On the other hand, the European Central Bank is indicating a pause in policy changes, which should minimize surprises and keep euro-related volatility more stable. This creates a clear contrast in policy expectations between the US and Europe, making the euro an attractive choice against the dollar until the Fed gives new guidance. Create your live VT Markets account and start trading now.

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