In a statement from the White House, Trump announced that Jerome Powell will be leaving his position soon. He criticized Powell for not cutting interest rates, noting that Europe has reduced rates ten times while the US has not. Trump said high rates are making it hard for people to buy homes and mentioned that they are paying over $1 trillion in interest. He believes rates should be at 1%, but instead, they are at 4%, which he blames on Powell.

Trump’s View on China

Trump has received an invitation from Xi to visit China and is considering it soon. He also noted that China is doing well in producing magnets. Treasury Secretary Bessent has called for an investigation into the Federal Reserve, insisting that rates should be lowered. He mentioned that Powell previously asked for a full audit but noted that Bessent is one of the candidates who might replace Powell. In other news, the dollar gained during European trading. Traders are keeping an eye on the USDJPY rate due to Japan’s elections. Trump has suggested a 15% to 20% tariff on EU goods, which could impact EURUSD rates. Currently, there are discussions about possible rate cuts by global central banks like the ECB and PBoC. The increased political talk targeting the Fed is likely to raise market volatility. The CBOE Volatility Index (VIX), which measures market fear, has recently been in the low teens. However, we expect it to rise as tensions between the administration and the central bank grow. Derivative traders might consider buying VIX call options or index straddles to prepare for the expected volatility.

Market Impact and Strategies

The administration’s demands for rate cuts put pressure on the front end of the yield curve. With the current Fed Funds rate between 5.25% and 5.50%, a drop to 1% would be significant, and markets will start to anticipate that possibility. We see value in derivatives that profit from falling short-term rates, such as purchasing SOFR or Fed Funds futures contracts for the coming months. However, pushing for such a drastic cut could lead to rising long-term rates due to inflation fears, as noted by Mr. Michalowski’s sources. A similar situation was seen in the 1970s when political pressure on the central bank contributed to high inflation and soaring long-term borrowing costs. A yield curve steepener trade, which bets on short-term rates falling while long-term rates rise, could succeed in this case. Mr. Bessent’s call for the central bank to “stay in their lane” while demanding cuts indicates that policy uncertainty will stay high, impacting currencies directly. The threat of a 15-20% tariff on European goods has us bearish on the euro, which is already weak due to slowing economic data, including a recent German manufacturing PMI that remains below 50, indicating contraction. We would consider buying puts on the EUR/USD currency pair. Trump’s mention of a possible visit to China adds another layer of complexity. While a high-level meeting could temporarily boost market sentiment, the underlying trade issues are still unresolved. This uncertainty supports owning options to guard against sharp, news-driven moves in either direction. Create your live VT Markets account and start trading now.

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