The European session was quiet, with little news and data available. The main topic was the UK CPI report, which exceeded expectations again. Services inflation rose to 5.0% year-on-year, raising concerns about the Bank of England’s recent decision to cut interest rates. The Pound saw an initial rise after the data release but quickly returned to previous levels. Changes in interest rate expectations were minimal. The central bank seems to prefer a lengthy pause or possible rate cuts, allowing for future adjustments.

Market Reactions and Expectations

Meanwhile, markets stayed stable or cautious, waiting for Fed Chair Powell’s speech at the Jackson Hole Symposium. Analysts believe Powell will avoid making firm commitments and will focus on data-driven decisions. If Powell suggests a possible rate cut in September, risk assets might soar. On the other hand, if he claims more data is needed to consider a rate cut, that would indicate a hawkish stance, likely leading to a risk-off attitude and increased demand for the US dollar. The latest inflation report from the UK surprised many—services inflation reached 5.0%, and the overall CPI hit 4.2%. This puts the Bank of England in a tricky spot, especially after they reduced rates in August. For those trading derivatives, this uncertainty around the Pound means options that thrive on volatility, like straddles on GBP/USD, could be worth considering. Despite the rising inflation numbers, the Pound’s rally didn’t last long—a trend we’ve seen before. The options market reflects this doubt, as pricing on future interest rates suggests the central bank will likely pause for an extended period instead of hiking rates. This indicates that any strength in the Pound might be a chance to position for limited gains, perhaps by selling out-of-the-money call options.

Jackson Hole Symposium

Now, everyone is waiting for Fed Chair Powell’s speech at the Jackson Hole Symposium later this week. We remember how his hawkish remarks in August 2022 led to a market sell-off, so we need to brace for possible volatility. Most expect him to maintain a data-dependent message, confirming a neutral stance for now. If Powell hints at a likely rate cut in September, we could see a strong rally in risk assets. This outlook is supported by the latest US CPI report, which indicated inflation has cooled to 2.8%, providing the Fed some leeway to ease policies. Traders might take positions by buying short-dated call options on equity indices or put options on the US dollar. On the flip side, if he stresses the need for more data before considering a cut, essentially ruling out a September move, the markets will view this as hawkish. This could be backed by the recent Non-Farm Payrolls report, which added a solid 250,000 jobs last month. With fed funds futures currently indicating a 60% chance of a cut, such a statement would likely lead to a market shift, driving equities lower and boosting the US dollar. Create your live VT Markets account and start trading now.

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