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The pound rises against the dollar due to differing central bank policies and economic data
The GBP/USD increased to its highest point in almost three weeks. This rise is due to different interest rate policies, with the Federal Reserve seeming more cautious than the Bank of England. Recent UK payroll data showed a smaller decrease than expected for July, prompting the Bank to be careful about speeding up rate cuts. The Bank of England has also lessened hopes for further rate reductions, predicting only modest cuts by year’s end.
In contrast, the Federal Reserve appears to be leaning towards lower interest rates, following a US inflation rate that came in lower than expected. Markets are anticipating a 25-basis-point cut in September and another in December, which could total around 60 basis points by the end of the year.
Reuters analysts expect the PBOC’s USD/CNY reference rate to be 7.1743.
The People’s Bank of China (PBOC) sets the daily midpoint for the yuan, also known as the renminbi. This is part of a managed floating exchange rate system, which allows the currency’s value to shift within a specific range. Currently, this range is +/- 2% around the midpoint.
Every morning, the PBOC determines a reference rate by looking at market supply and demand, economic indicators, and global currency trends. This midpoint serves as a guide for trading that day. During trading, the yuan can vary within a +/- 2% band from this midpoint.
PBOC Intervention Tactics
If the yuan’s value approaches the limits of the trading band or shows high volatility, the PBOC may step in. This means they could buy or sell the yuan to keep the market stable. Such actions help manage the currency’s value in a controlled way. The expected USD/CNY midpoint of 7.1743 indicates that the central bank is trying to gradually lower the yuan’s value. Recent weak export data from July showed a 5.1% decline compared to last year, and the unexpected cut to the 1-year MLF rate last week adds more pressure on the currency. We can expect the PBOC to set the daily fix stronger than market expectations to help slow this decline. This situation creates a tension between the central bank’s actions and what the market reflects. The spot USD/CNY rate will likely stay towards the weak end of its 2% daily trading range, showing ongoing demand for the dollar over the yuan. This daily behavior allows traders to use range-based strategies, but there is always a risk of sudden policy changes. For those trading derivatives, this environment suggests that implied volatility might be lower than it should be. Though the PBOC is stabilizing daily price movements, the economic pressure is building, meaning a larger, unexpected move could happen soon. It may be wise to buy low-cost, out-of-the-money call options on USD/CNY to prepare for a possible sharp weakening of the yuan if the authorities choose to allow it.Historical Context and Future Outlook
Looking back at 2023 and 2024, we saw a similar situation where the Fed’s rate hikes put pressure on the yuan. The PBOC managed to defend the currency then, preventing it from slipping disorderly past the 7.35 mark. This shows the PBOC has both the ability and the will to intervene, but ultimately, economic fundamentals will influence the exchange rate. In the coming weeks, it’s important to monitor the gap between the PBOC’s daily fixing and market expectations. If this gap widens, it signals rising pressure and makes long volatility trades more appealing. We should take advantage of this period of managed stability to set up positions that will benefit from the needed and likely upcoming adjustment in the currency’s value. Create your live VT Markets account and start trading now.Australia’s stock market opens higher with broad gains across sectors following Wall Street’s performance
The Australian stock market went up on Thursday. The S&P/ASX200 index gained 55 points, or 0.6%, reaching 8,879.
Most sectors saw increases, with nine out of eleven doing well. Financial stocks led the way in bouncing back after a decline the day before, while communication services lagged behind.
Market Hits Record High
The market is strong, pushing the ASX200 to a new high of 8,879. This marks new ground, well above the old resistance level of about 7,900 from 2024. With broad support across different sectors, the overall mood seems positive for now. The rise in financial stocks is especially significant, likely linked to interest rate expectations. The Reserve Bank of Australia has kept the cash rate steady at 4.85% for several months, backed by a recent quarterly inflation figure of 3.1%. This stability reassures traders about bank profit margins, prompting them to invest in the sector again. Since we’re at record levels, it’s wise to consider strategies that guard against a potential downturn. Buying put options on the XJO index could be a smart way to protect against any sudden bad news. The implied volatility, measured by the A-VIX index, is low at around 11, making protective options relatively cheap compared to previous years.Exploring Trading Strategies
Communication services are lagging, creating a chance for pairs trading. You could buy a financial sector ETF while selling a communications-focused ETF to take advantage of this performance gap. This approach can highlight specific sector trends while minimizing overall market risk. In the coming weeks, we should watch upcoming employment and retail sales data for signs of economic weakness. Such information could quickly challenge the market’s current optimism and this new trading level. Therefore, it’s crucial to stay flexible with derivative positions. Create your live VT Markets account and start trading now.JPMorgan warns that tariffs could slow economic growth and drive inflation to record highs
JP Morgan predicts that US tariffs could cut GDP by 1% and raise inflation by 1% to 1.5%. Michael Feroli, chief US economist at JPMorgan, says these tariff hikes are the largest since World War II. There is uncertainty regarding how much of these increased costs will be passed on to consumers.
Impact on GDP and Inflation
The expected GDP impact primarily comes from lower consumer spending, which makes up about two-thirds of the US economy. JP Morgan forecasts a GDP decline of nearly 1% in the second half of the year. This is due to lower inventories before tariffs and an increase in effective tariff rates from 3% to about 18%. While inflation is not expected to spiral out of control, economists anticipate monthly core price increases of 0.3% to 0.5%. This could push the Federal Reserve’s preferred inflation measure to the lower to mid-3% range. Concerns are growing as the end of the de minimis tariff exceptions for imports under $800 approaches on August 29. This change may raise retail prices. Many companies are hesitant to absorb these higher costs, leading to broader market anxiety. With the potential for a 1% drop in GDP and a 1.5% increase in inflation, we should get ready for more market volatility. These tariff pressures create a tough environment of slow growth and rising prices, which may affect how assets typically perform in the coming weeks.Implications for Market Volatility
We are heading toward higher market volatility. The CBOE Volatility Index (VIX) has been relatively low, recently around 15, but these challenges could drive it back above 20. We should consider buying VIX call options expiring in September as a hedge against rising market fear. The slowdown in economic growth, which dropped to 1.4% in the second quarter of 2025, suggests we should take a defensive approach to equities. Buying put options on broad market indices like the S&P 500 may be wise. The impact on spending directly threatens corporate earnings, which might not yet be fully reflected in market prices. The threat of rising inflation complicates the outlook for interest rates, making it less likely that the Federal Reserve will cut rates this year. After core inflation rose to 0.4% in July 2025, any further increase could put pressure on bond prices. We can prepare for this by considering put options on long-term Treasury bond ETFs. A key event to monitor is the August 29 end of the de minimis tariff exception. Because over a billion packages entered the US under this rule in 2024, its removal will significantly affect the profit margins of many online retailers. Traders should look at put options on retail-focused ETFs expiring in September or October to take advantage of any negative market reactions. Create your live VT Markets account and start trading now.MUFG expects the dollar to weaken due to carry trades benefiting from low volatility and anticipated rate cuts.
MUFG reports that the US dollar is facing a higher risk premium due to uncertainty about upcoming changes in Federal Reserve leadership and concerns about political influence on US economic data. This is happening even as trade policy risks have recently lessened.
Last week’s US CPI data kept the door open for the Fed to start reducing rates as early as next month, which has contributed to a temporary dip in the dollar’s value.
Low Market Volatility
In foreign exchange markets, carry-trade currencies are doing particularly well due to a steady drop in market volatility. MUFG noted that key measures of FX volatility have hit their lowest levels in over a year, making higher-yielding currencies more attractive. We think the US dollar is under pressure from the likelihood of a Federal Reserve rate cut and worries about political influence on economic data. This situation creates clear opportunities for traders in the weeks ahead. The dollar’s weakness is evident even as some trade policy risks have eased. The consumer price index data from early August 2025 showed an increase of 2.8%, indicating that inflation is slowing. This gives the Fed room to cut rates at its September meeting. Markets are now pricing in a strong likelihood of a cut, which contributes to the dollar’s current weakness. A significant factor for traders is the notable decrease in currency market volatility. The Deutsche Bank Currency Volatility Index (CVIX) recently fell below 5.5, a level not seen since mid-2024. This low-volatility environment makes carry trades, where you profit from interest rate differences, especially appealing.Investment Strategies
As a result, we should explore strategies that involve borrowing US dollars to invest in currencies with higher interest rates, such as the Australian dollar or the Mexican peso. This allows us to collect the yield difference, which is profitable as long as the dollar doesn’t rise suddenly. The current low volatility lowers the risk of such sharp changes. With volatility now so low, derivative options are surprisingly cheap. This creates a favorable risk-reward situation for buying call options on higher-yielding currencies against the dollar. This method gives us upside potential with clearly defined and limited downside risk. This environment is similar to parts of 2024, where a hunt for yield in a stable market led to similar trading patterns. We should make the most of these conditions, as periods of low volatility can provide steady returns. However, we must remain cautious, as these situations do not last indefinitely. Create your live VT Markets account and start trading now.Bitcoin surpassed $123,000 and Ethereum exceeded $4,700, driven by potential Fed rate cuts.
Bitcoin’s value has soared above US$123,000, marking a 30% increase this year. It continues to climb alongside Ethereum, which is now over US$4,700.
This upward trend persists despite no major news. Speculation about possible interest rate cuts by the Federal Reserve is boosting gains against the US dollar.
The Impact Of Rate Cuts
The market is rallying because many expect the Federal Reserve to lower interest rates soon. A weaker dollar makes assets like Bitcoin more appealing. This belief grew stronger when July’s inflation rate came in at a lower than expected 2.8%, increasing chances for a rate cut this September. For options traders, this scenario favors buying strategies. There is more demand for call options than for put options, as shown by the positive 25-delta skew for September and October contracts. Consider purchasing call spreads to benefit from further gains while keeping your maximum risk clear. In the futures market, expect costs to hold long positions since funding rates for perpetual swaps remain consistently positive. This indicates strong bullish sentiment, but be cautious about using excessive leverage. A market filled with long positions can be at risk of a sudden drop. This price movement resembles the rally that followed the approval of spot ETFs in 2024. We are seeing significant net inflows into those products again, with reports of over $1.5 billion added in the past 30 days. This demand from institutions provides solid support for the market.Ethereum’s Fundamental Strength
Ethereum is showing strength beyond its link to Bitcoin. The amount of ETH staked has recently surpassed 30% of the circulating supply for the first time. This reduces the supply available for sale and indicates strong confidence among holders. The main risk to this trend is if the Federal Reserve does not follow through with the expected cuts. All eyes will be on the upcoming Jackson Hole Symposium later this month for any changes in the Fed’s tone. A surprisingly hawkish message could quickly reverse the recent gains. Create your live VT Markets account and start trading now.Concerns about tax and rate uncertainties slowed down the performance of the UK housing market.
The UK housing market slowed down in July, with price growth reaching its lowest level in a year. Concerns are growing about possible tax increases in the upcoming budget from Chancellor Rachel Reeves. The Royal Institution of Chartered Surveyors (RICS) noted that the house price balance fell to -13 from -7 in June, the lowest since July 2024.
Buyer demand and agreed sales turned negative, while the short-term sales forecast stayed the same. Uncertainty about the Bank of England’s future rate decisions and potential tax hikes in October or November contributed to this negative outlook.
The Rental Market Decline
The rental market also faced challenges, with new landlord instructions dropping to their lowest level since April 2020, according to RICS. Surveyors expect this could lead to higher rents, as landlords worry about new laws that might strengthen tenant rights. RICS’s findings contrast with reports from Halifax and Nationwide, which showed a rise in house prices for July. Meanwhile, the GBP/USD exchange rate reached a high of 1.3581. Considering the weakening housing data, it may be wise to consider bearish positions on UK housebuilders. Buying put options on major developers could give downside exposure while limiting risk ahead of the autumn budget. This strategy anticipates that the recent drop in buyer demand will soon affect corporate earnings forecasts. The broader economic context supports caution, as recent data reveals that UK economic growth slowed to just 0.1% in the last quarter. Additionally, the latest inflation figures show the Consumer Price Index at 2.1%, giving the Bank of England room for further rate cuts. This slow growth and potential easing suggest that cyclical stocks, like housebuilders, could be at risk.Opportunities in Interest Rate Derivatives
The uncertainty surrounding the Bank of England’s next move presents an opportunity in interest rate derivatives. Following the narrow vote to cut rates last week, we might consider going long on Short Sterling or SONIA futures. This would be profitable if the Bank has to stimulate the slowing economy with another rate cut soon. With the pound’s current strength (GBP/USD at 1.3581), it may be a good time to sell against this backdrop. We can use currency options to bet on a decline in sterling, especially since potential tax hikes from Chancellor Reeves could pose challenges. Any further signs of economic weakness will likely weigh on the currency, making this a smart trade. For those uncertain about direction, the upcoming budget and rate decisions suggest market volatility will likely increase. We could buy straddles on the FTSE 100 or on sterling, which would profit from significant market moves in either direction. This directly plays on the uncertainty affecting market sentiments. However, we must consider the conflicting data from Halifax and Nationwide, which indicated price rises. This suggests the market isn’t plummeting, so outright short positions carry risks. A more cautious approach could involve a pairs trade, like shorting a UK-focused bank while going long on a global company. Looking back, we experienced a similar period of market uncertainty due to policy indecision in late 2024, just before the last major fiscal statement. That experience showed that markets often hold steady until they get clarity from the government and the central bank. We expect a similar pattern to unfold in the coming weeks as we approach October. Create your live VT Markets account and start trading now.A survey shows that Japanese firms largely support the US tariff agreement, expecting more price increases.
A recent survey shows that 75% of Japanese companies view the new US-Japan tariff agreement positively. This comes after Japan received concessions from the US, leading to lower import duties. Under the July agreement, US tariffs on Japanese goods were reduced from 25% to 15%, and the auto tariff decreased from 27.5% to 15%.
Mixed Reactions To The New Tariff Deal
Despite the reductions, the auto tariff is still significantly higher than the previous 2.5% rate before the Trump administration. Roughly 38% of companies expect negative earnings due to this deal, while 20% anticipate a positive impact. For example, Toyota lowered its profit forecast by 16%, while Sony raised its outlook by 4%, citing less severe tariff effects. The survey shows that almost all companies plan to maintain their capital spending despite the new agreement. Furthermore, 54% of companies intend to increase prices to manage rising costs, while 46% believe they can’t raise prices much more. Some businesses worry that higher prices are already dampening demand and shrinking markets. We see the US-Japan tariff deal not as a solution but as a shift in risk. In July, the Nikkei 225 rallied briefly after the announcement but has since remained stable, indicating ongoing uncertainty. This suggests that broad investments might not be as effective as focused strategies. The divide between winners and losers is becoming clearer, presenting opportunities for paired trades. We believe electronics exporters, who faced less severe tariff effects, may be favored over automakers burdened with a steep 15% tariff. Traders might consider long calls on strong tech stocks versus puts on vulnerable auto manufacturers. The yen’s response illustrates a story of initial relief followed by ongoing concern. After strengthening post-deal, the USD/JPY has since weakened, currently around 148 as the market evaluates the ongoing challenges for Japan’s key export sector. We expect this currency weakness to continue as fears about economic growth outweigh the benefits from tariff relief.Inflation Concerns And Market Volatility
With over half of the companies planning to raise prices, inflation is a major concern for the coming weeks. Japan’s core CPI has consistently remained above the central bank’s target throughout 2025, complicating monetary policy. This situation makes interest rate derivatives more important as they can hedge against unexpected policy changes. Reflecting on the US-China trade war of 2018-2019, we noted that initial tariff announcements led to several months of increased volatility. The current landscape feels similar, implying that options strategies that benefit from price fluctuations, such as straddles, could be beneficial. We anticipate the Nikkei Volatility Index, which is currently below its yearly average, will begin to rise. Next, we must focus on upcoming economic data to confirm corporate sentiment. The forthcoming Tankan survey will be critical in assessing if business confidence remains strong after the initial relief. We will also closely monitor Japan’s monthly trade balance figures to evaluate the real effects of the 15% auto tariff on export volumes. Create your live VT Markets account and start trading now.Jerome Powell faces two disappointing options at Jackson Hole as market expectations remain uncertain
Jerome Powell is set to speak at the Federal Reserve’s Jackson Hole summit on August 22. Morgan Stanley suggests he may lower expectations for a 50 basis point rate cut in September, which could disappoint the markets. Some experts think he might oppose any rate cuts, which could also cause frustration. Alternatively, he may not challenge existing expectations, leading to disappointment before the September meeting.
Morgan Stanley Wealth Management emphasizes that the views of Federal Reserve officials on market expectations are crucial before the September policy meeting. If they believe the market has gotten it wrong, they might publicly address it. Officials against a near-term rate cut are likely to share their opinions.
Powell’s Upcoming Speech
All eyes are on Powell’s speech at the yearly Jackson Hole symposium, seen as important as a policy meeting. Morgan Stanley thinks Powell will keep the door open for a September cut but clarify that a 50-basis-point cut is unlikely. While a 25-basis-point reduction is still expected, Powell may try to ease hopes for a larger cut. The Jackson Hole Economic Policy Symposium runs from August 21 to 23, 2025. Powell’s August 22 speech creates notable uncertainty, especially since market fear, measured by the VIX, has risen from 14 to 19 last month. This indicates traders are preparing for potential market shifts. Even a hint from Powell could significantly impact markets in the upcoming weeks. Current markets reflect this uncertainty. As of today, derivatives markets suggest a 70% chance of a 25-basis-point cut in September, while there’s still a 15% chance for a more aggressive 50-basis-point cut—something the Fed might want to downplay. Recent data is causing the Fed to be cautious about indicating any significant cuts. The July Consumer Price Index came in at a stubborn 2.8%, and the unemployment rate rose to 4.1%. This mixed data gives Powell the ability to let down those expecting a strong signal for aggressive easing.Market Strategies and Historical Context
With the nature of Powell’s upcoming speech being binary, a strategy for traders is to buy volatility. They are considering options strategies like straddles or strangles on indices such as the S&P 500. This allows them to profit from significant price movement in either direction without needing to predict whether Powell will be hawkish or dovish. For those betting that Powell will resist rate cuts, purchasing protective puts is a more direct strategy. This acts as a safeguard against a potential market drop if his comments are perceived as hawkish. In essence, it’s a bet that Powell will disappoint markets by ruling out a September cut. We recall Powell’s speech at Jackson Hole in August 2022, where his clear message about tackling inflation led to a sharp drop in stocks. This past experience hints that a hawkish surprise is a real possibility and should be prepared for. The market learned then not to underestimate Powell’s determination. Even if Powell signals the expected 25-basis-point cut, it might trigger a “sell the fact” reaction. As this cut is already somewhat reflected in market pricing, the confirmation could lead to profit-taking. This suggests that even the most anticipated outcome might not generate the rally that some traders hope for. Create your live VT Markets account and start trading now.Trump is considering Rick Rieder’s candidacy for Fed chair because of his 50 basis point cut proposal.
Rick Rieder from BlackRock is a possible candidate for the Federal Reserve chair position, considered by Trump. After the latest U.S. CPI report, Rieder predicts the Fed might cut rates by 50 basis points in September because inflation was lower than expected.
The new U.S. inflation data showed stronger numbers than recent months but didn’t rise to the levels the markets expected. There are positive signs in core inflation, which is lower than in previous years.
