The USD is mostly stable as we wait for rate decisions from the Federal Reserve and the Bank of Canada. The Fed is expected to lower rates by 25 basis points to 4.25%. This would be its first rate cut since December 2024, following disappointing US job figures. Similarly, the Bank of Canada is projected to announce a 25 basis point cut. This expectation arises due to economic issues like a 0.4% drop in GDP in the second quarter and rising unemployment. With inflation now at 1.9%, a rate cut seems justified.

Currency Movements

Currency shifts show that the EURUSD has dropped by -0.24%, after a previous rise. The USDJPY fell by -0.12%, approaching important moving averages. The GBPUSD is nearly unchanged at -0.02%, while the USDCAD saw a small increase of 0.08%. US stock indices are mixed before the market opens. The Dow is up by 32 points, but the S&P and NASDAQ have fallen by -2.26 points and -16.25 points, respectively. In commodity markets, crude oil is at $64.23, gold is down by $20.67, silver has decreased by $0.88, and Bitcoin has dropped by $560. European stock indices are showing mixed results, reflecting the recent changes in the market. The Federal Reserve is likely to cut rates by 25 basis points today, the first reduction since last December. This action follows signs of a slowdown, highlighted by the August jobs report showing only 95,000 new jobs compared to an expected 180,000. The unemployment rate also rose to 4.1%, indicating a weaker labor market.

Market Reactions

With both the Fed and Bank of Canada making decisions today, we are seeing an increase in implied volatility. The VIX index has risen to 19 this week from a summer low of 14. Derivative traders are preparing for a possible market shift; the Fed’s future guidance may be more crucial than the anticipated rate cut itself. A key concern is whether this cut is a one-time “insurance” move or signals the beginning of a longer easing cycle. In Canada, the anticipated rate cut is based on clear economic signals. The second-quarter GDP contracted by 0.4% annualized, and the unemployment rate is now at 6.3%. This gives the Bank of Canada a strong reason to ease policy today. For currency options, the USDCAD faces the challenge of two central banks easing rates, making strategies like short strangles appealing if the pair stays within a range. The EURUSD’s volatility shifted after yesterday’s rally, making call options more expensive ahead of the Fed’s announcement. Meanwhile, the USDJPY is testing its 100-day moving average at 146.19, which could be key for structuring put option strategies. We should remain cautious, as the first rate cut in a cycle does not always signal good news for risk assets. Looking back at the Fed’s first cut in July 2019, markets initially declined because the guidance was less dovish than expected. The pre-market weakness in the Nasdaq and the significant $20 drop in gold prices from their record highs indicate that some of this caution is already being factored in. Create your live VT Markets account and start trading now.

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