A report from the Wall Street Journal indicates that job growth is slowing this summer. This slowdown may prompt the Federal Reserve to lower interest rates by 25 basis points at their next meeting. The chance of a 50 basis point cut is now less likely, with market expectations at only 14%. The latest jobs report adds uncertainty about future rate cuts after September.

Fed’s Upcoming Rate Decisions

Today’s jobs report makes a 25 basis point rate cut at the Fed’s meeting in two weeks almost certain. The market has reacted quickly, with the likelihood of a 25 basis point cut jumping to over 95% from about 70% yesterday, according to the CME’s FedWatch Tool. This clarity allows traders to confidently adjust their expectations for short-term interest rates. Some in the market still see a 14% chance of a 50 basis point cut, hoping for a more aggressive action. While this is a long shot, it lets options traders bet on a bigger-than-expected policy change. We recall how quickly the Fed acted during the 2022 hiking cycle, making it important to watch these low-probability scenarios for potential profit. Our focus now turns to the rate cuts *after* September, which the latest report makes less clear. Job growth has averaged only 150,000 over the last three months, down from the 250,000 average earlier this year, indicating a clear economic slowdown. However, with core inflation still stubbornly above 3%, the Fed is likely to proceed cautiously, avoiding a quick series of cuts.

Market Volatility and Currency Implications

This uncertainty signals a good opportunity for volatility-based trades. The VIX index is at about 14, which is low compared to its historical average of around 20. Buying protection or betting on wider market swings may be undervalued. Strategies involving options on equity indices or interest rate futures could do well as discussions about future rate cuts heat up heading into the fourth quarter. We should also expect renewed pressure on the US dollar as the Fed seems ready to ease rates. If a cut happens in September, along with the possibility of additional cuts, it could limit the rise of the Dollar Index (DXY). This suggests preparing for dollar weakness against currencies from central banks that aren’t ready to lower their rates yet. Create your live VT Markets account and start trading now.

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