Trump has announced the removal of Fed Governor Lisa Cook, which has quickly impacted financial markets. This decision has caused the US dollar to drop sharply against other currencies. In response, gold prices are rising. Trump is trying to push the Federal Reserve to lower interest rates and plans to nominate someone who aligns with his policies if Cook is removed. He shared this news on his social media platform, along with an image of the dismissal letter.

Increased Market Volatility

We are now seeing higher market volatility. Institutional norms are breaking down, leading to larger price swings. The VIX index, which was around 14 last week, could rise into the 20s. Traders should consider strategies like long straddles on the SPX, which benefit from significant moves in either direction, as political news will likely drive market trends. The US dollar is likely to remain weak for the near future. A central bank’s credibility is crucial for its currency’s value, and this is currently under threat. It may be wise to buy call options on major currency pairs against the dollar, like EUR/USD and USD/JPY puts, as reserve managers might reconsider their dollar holdings. Interest rate markets no longer reflect economic data accurately. Even with July 2025’s inflation showing a steady 3.4% core CPI, the market is pricing in aggressive rate cuts because the Fed’s decision-making is compromised. Traders can use SOFR futures or options to bet on a more dovish stance for interest rates through 2026, regardless of upcoming employment or inflation reports.

Gold’s Response to Market Chaos

Gold is clearly benefiting from this turmoil. The increase in gold prices is a direct reaction to the falling dollar and the growing risk of inflation if the Fed keeps interest rates low. This situation is similar to the 1970s, when political pressure on the Fed led to a significant rise in precious metal prices. Buying call options on gold futures is a direct way to capitalize on this trend. In the stock market, this new environment poses risks. Generally, lower interest rates are good for stocks, but political and institutional uncertainty is a significant concern. There may be a flight to quality, so hedging is essential. Purchasing protective put options on major indices like the Nasdaq 100 can help guard against a sudden loss of confidence in US markets. We have seen similar situations in other countries, serving as a warning. For instance, the Turkish Lira’s long-term decline got worse each time there was political change in the central bank’s leadership. The market will now keep an eye on whether this is just a one-time event or the start of a trend that could change the perception of risk in US assets. Create your live VT Markets account and start trading now.

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