The US Treasury has announced that it needs to borrow a total of $1.007 trillion for the September quarter. This is an increase of $453 billion compared to the initial forecast in April. The increase in borrowing stems from lower cash reserves at the beginning of the quarter. For the October to December period, the Treasury plans to borrow $590 billion, aiming to have cash balances of $850 billion by the end of December.

Key Factors to Watch

According to Michalowski, the significant rise in government bond supply is crucial. This increase in Treasury bonds is likely to lower bond prices, which will subsequently push interest rates higher. This situation presents a clear opportunity to invest in rising yields. Typically, this environment is challenging for stocks, especially for growth companies sensitive to higher borrowing costs. After this news emerged, the CBOE Volatility Index (VIX), a major indicator of market fear, jumped from below 14 to over 17 in early August. This suggests it’s wise to consider protective put options on major equity indices like the S&P 500 or Nasdaq 100. For direct investment, we are focusing on interest rate derivatives. The 10-year Treasury yield increased from about 3.8% before the announcement to over 4.2% recently, surpassing key technical levels. This supports strategies like shorting Treasury bond futures or buying puts on bond ETFs such as TLT.

Impact of US Credit Rating Downgrade

This situation is made more complex by Fitch Ratings’ recent downgrade of the U.S. credit rating due to the rising debt burden. Historically, such downgrades can undermine investor confidence and increase government borrowing costs. This external validation reinforces the case for a higher-yield environment. Higher U.S. interest rates compared to other countries could attract foreign investment, boosting demand for the U.S. dollar. The U.S. Dollar Index (DXY) has already risen over 2.5% since late July. We expect this strength to continue, making long positions in the dollar against other currencies an appealing strategy. Create your live VT Markets account and start trading now.

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Mexico’s unemployment rate stayed steady at 2.7% in June. This number hasn’t changed from last month, showing that the job market is stable. In the foreign exchange market, the Australian Dollar is under pressure, with the AUD/USD close to 0.6500. The EUR/USD has also dropped, falling below 1.1600. Gold prices are on a downward trend but are still above $3,300 per troy ounce. Ethereum has shown slight ups and downs, trading around $3,803 after hitting an intraday high of $3,941. The Federal Reserve is being watched closely for deciding to hold off on rate cuts during a time when the economic outlook is uncertain. Forex market participants should be aware of their risk tolerance due to potential financial losses. We think the Federal Reserve’s choice to delay rate cuts is a key factor for the coming weeks, which supports a strong U.S. dollar. Current market data suggests that traders do not expect a rate cut until at least September. Because of this, strategies that benefit from a strong dollar, such as buying call options on the U.S. Dollar Index (DXY), may be worth considering. The pressure on the Australian dollar is connected to the Federal Reserve’s policy and slowing economic data from China, its biggest trading partner. We believe buying put options on the AUD/USD as it approaches the 0.6500 support level could be wise. The euro is also facing challenges, weakened by the European Central Bank’s rate cuts in early June, which creates a policy difference that traders can take advantage of. Regarding gold, it’s important to note that its price is holding above the critical $2,300 per troy ounce mark, contrary to earlier figures. The downward trend is expected due to high interest rates that increase the cost of holding non-yielding assets. We think selling out-of-the-money call options on gold could generate income, as significant price increases seem unlikely in the short term. The fluctuations in Ethereum show a market impacted by broad economic pressures and specific factors, like the potential approval of spot Ether ETFs. High implied volatility makes option strategies like straddles appealing, as they allow traders to profit from significant price movements in either direction without needing to predict the outcome. Historically, such regulatory developments have led to unpredictable price changes in cryptocurrencies. The stability in Mexico’s job market is a positive sign locally, but it is overshadowed by the broader global economic situation. Considering risk tolerance, we recommend using derivatives to hedge against existing exposures. For instance, traders with substantial international stock holdings might consider buying VIX futures to protect themselves from sudden increases in market volatility driven by unexpected U.S. policy changes.

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Mexico’s trade balance for June showed a surplus of $0.514 billion, down from $1.029 billion in the previous month. This change reflects a shift in trade patterns compared to earlier months. The AUD/USD fell, indicating a weaker Australian Dollar due to pressure from a stronger US Dollar. At the same time, the EUR/USD dropped below 1.1600, influenced by developments in the US-EU trade agreement and upcoming economic data releases.

Gold And Ethereum Outlook

Gold prices neared $3,300 per troy ounce as the US Dollar gained strength, lowering demand for the metal. Ethereum (ETH) traded at $3,803, down slightly after reaching a high of $3,941 during the same session. The US Federal Reserve faces criticism for not cutting rates despite strong economic performance and labor market concerns. Brokers are being evaluated for their features, such as low spreads and solid trading platforms. Currently, the Federal Reserve’s reluctance to cut rates seems to be driving the market. Recent US inflation data for May, which was slightly lower at 3.3%, hasn’t changed the Fed’s strict stance. This ongoing policy firmness supports a strong US Dollar in the coming weeks. We expect the EUR/USD pair to weaken further, especially after the European Central Bank cut its interest rates in early June. The different monetary policies in the US and Europe create a solid reason for the dollar to outperform the euro. We’re exploring derivative strategies that benefit from a decline towards the 1.1500 level or lower. Similarly, the Australian Dollar may struggle due to the strong greenback and mixed economic data from China, its largest trading partner. Historically, periods of aggressive US policy, like in 2022, have led to significant declines in the AUD/USD. Traders should consider this pressure when making decisions on the pair.

Commodities And Digital Assets

In commodities, a strong dollar is likely to limit gold’s potential for price increases from its current level of around $2,320 per ounce. High US Treasury yields raise the opportunity cost of holding non-yielding assets, making gold less appealing. We advise caution on new long positions until we see a clear dovish shift from Powell’s committee. The shrinking trade surplus in Mexico suggests a possible cooling in export strength, which might bring volatility for the peso. Although the USD/MXN has been a popular trade, this new data signals that regional dynamics may be changing. We will monitor upcoming trade balances for signs of a consistent trend. The small drop in Ethereum after its recent high indicates that risk appetite for speculative assets may be declining. This is a typical reaction when the dollar strengthens and market uncertainty increases. Traders should prepare for fluctuating price action in digital assets rather than a steady rise. Create your live VT Markets account and start trading now.

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Crude oil futures are up, reaching a one-week high thanks to geopolitical tensions and positive economic news. The price increase follows President Trump’s announcement to speed up a peace deal between Russia and Ukraine, which is now expected in 10 to 12 days. This raises worries about possible sanctions on Russian energy exports. There is also optimism about trade deals with the EU and China, which helped boost the market. The EU’s continued sanctions against Russia and possible discussions among OPEC+ to stop increasing production this fall further supported the price rise. However, gains were limited by a strong US dollar and rising global crude inventories.

Technical Analysis Of Price Action

On the technical side, crude oil prices have risen above the 200-hour moving average, which is at $66.26. Staying above this level indicates that buyers are in control for now. The day’s highest price was $67.02, and if this level is surpassed, it could be a positive sign. Traders are looking at a trendline around $67.88. We suggest that derivative traders prepare for higher prices in the coming weeks by buying call options. This approach allows them to take advantage of potential gains from supply risks while keeping their maximum loss limited. Current market sentiment is supported by tight supply and ongoing geopolitical concerns. OPEC+ decided on June 2nd to extend production cuts of 2.2 million barrels per day into the third quarter, which is a strong support for prices. This move, combined with rising tensions in the Middle East, adds a significant geopolitical risk premium. We see supply pressures as the main reason prices aren’t likely to drop significantly.

Demand Side Factors

On the demand side, there are some challenges that could create price swings and buying chances during dips. The US Dollar Index (DXY) has remained strong, above 105, making crude more costly for foreign buyers. Additionally, the latest report from the U.S. Energy Information Administration (EIA) showed a surprise inventory increase of 1.2 million barrels, contrary to expectations for a decrease. From a technical viewpoint, WTI crude is finding support near its 200-day moving average around $77.80. If it decisively moves and holds above the 50-day moving average, currently at $79.50, it would indicate strong bullish momentum. Traders would likely then target the psychological level of $80 and beyond. Create your live VT Markets account and start trading now.

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The Euro fell again on Monday after details about the EU-US trade deal were announced. Eurozone products now face a 15% tariff, alongside strong EU investment pledges and American purchases. The Euro dropped 120 pips, marking its worst day in months, while the US Dollar gained strength from positive US economic data. The new trade agreement between the EU and US did not help the Euro, which stayed around 1.1650 before the US market opened. The leaders of the European Commission and the US signed the deal, which cut tariffs from an initially promised 30% to 15%. In return, the Eurozone committed EUR 600 billion to invest and agreed to buy more gas and military goods from the US.

Impact of US Economic Data

US Durable Goods Orders showed a decline, but the drop was less severe than expected, which helped support the Dollar. In addition, a decrease in Initial Jobless Claims highlighted a strong job market. This situation strengthens the Federal Reserve’s current policy, suggesting no immediate interest rate changes. The EUR/USD pair fell below the key level of 1.1700, confirming a downtrend. Negative technical indicators pushed the pair lower. To break this trend, it would need to rise above 1.1710, focusing on higher intraday and previous highs from July. Given the confirmed downtrend, traders might consider buying put options on the EUR/USD. Choosing strike prices below the breached 1.1700 level could take advantage of the ongoing downward momentum, aligning with the negative technical signals.

Diverging Monetary Policies

The Euro’s fundamental weakness is worsened by differing monetary policies. The U.S. Federal Reserve’s key interest rate is 5.25-5.50%, while the European Central Bank’s rate is lower at 4.50%. This significant gap makes U.S. dollar assets more appealing, attracting investments away from the Euro. Strong U.S. job market data reinforces the stance against immediate interest rate changes. Recent economic activity backs this up. The HCOB Eurozone Composite PMI for November 2023 came in at 47.6, indicating a contraction. On the other hand, the U.S. ISM Services PMI was at 52.7, showing growth in its largest economic sector. This economic divergence supports the Dollar’s strength beyond the immediate effects of the trade deal. Historically, similar policy divergences, such as those from 2014-2016, have led to prolonged declines in this currency pair. Recent reports from the CFTC show that large traders are increasing their short positions on the Euro, indicating a general market sentiment. Therefore, we see any bounce back toward the 1.1710 resistance as a chance to initiate or add to bearish positions. Create your live VT Markets account and start trading now.

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The GBP/USD pair is struggling to recover and is trading just above 1.3400, remaining in negative territory. The outlook stays bearish as the USD performs better, thanks to reduced worries about a possible US economic slowdown. The EU-US trade deal includes a 15% tariff on goods and an EU investment of $600 billion in the US. This week, the USD experienced its largest drop in a month, but gains for GBP/USD were limited by resistance at the 1.3600 level.

Sterling Under Pressure

The GBP/USD pair has fallen for two days in a row, showing a decline of 1% in that time. Weak business activity, job cuts in Britain, and worries about government finances are putting pressure on Sterling. The failed attempt to break the resistance level at 1.3576 adds to these concerns. The recent trade deal is also affecting EUR/USD, which has dropped toward 1.1650, as the Euro struggles to attract demand amid strong USD performance. Additionally, Gold is trading below $3,350 due to positive risk sentiment and rising US bond yields. Key upcoming events include America’s August 1 trade deadlines, the Federal Reserve’s interest rate decisions, and Nonfarm Payroll reports, all of which could create a volatile week in the market. Discussions about when the Federal Reserve might cut rates continue amid global economic uncertainties.

Market Volatility Ahead

We expect the downward pressure on GBP/USD to continue, making long-dated put options an appealing strategy. The recent S&P Global/CIPS UK Composite PMI has dropped to a seven-month low, confirming weak business activity. This suggests that the inability to break key resistance is a significant bearish signal. Job cuts are a major concern, with UK job vacancies falling for 23 straight months as of May 2024, worsening the negative outlook. Public sector net debt is around 99.8% of GDP, the highest level since the 1960s, further weighing on the pound. We see little chance of a short-term reversal. The upcoming Nonfarm Payrolls report and Fed interest rate decisions are crucial events that will likely bring significant market volatility. Historically, these reports can cause intraday swings of over 100 pips, creating opportunities for traders anticipating price movement. Consequently, we are considering straddle or strangle strategies to benefit from expected price changes, regardless of direction. The euro’s struggle for demand is a common theme in the market, reinforcing our belief in the dollar’s strong performance. Additionally, pressure on gold is linked to rising US bond yields, with the 10-year Treasury yield remaining above 4.2%. This environment makes holding assets that do not yield interest more expensive, further encouraging capital to flow into the dollar. Create your live VT Markets account and start trading now.

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The S&P index hit a session high of 12.43 points but has now fallen, trading down by 4.07 points. It also reached a session low of -6.29 points. In contrast, the NASDAQ index is up by 51.87 points, or 0.25%, with fluctuations between 13.80 and 93.86 points. The Dow industrial average reached a high of 45.06 points and a low of -108.15 points. It hovers near the low at -97 points, a decrease of -0.22%. Both Nvidia and AMD stocks have posted gains, with Nvidia up 1.14% and Broadcom down by 0.94%. SMCI, which produces Nvidia chips, climbed by 7.64%.

US/EU Trade Deal Impact

The US/EU trade deal benefits American chipmakers, raising AMD’s target price from $150 to $210 by UBS. AMD’s stock has bounced back by 128% since a prior downturn of 65%, yet it is still below the 2024 high of $227. Today, AMD reached a high of $174.70 but did not surpass the October peak of $174.05. The hourly chart indicates AMD’s price has been trending upward since April, staying above the 100-hour and 200-hour moving averages, which signals strong momentum. The current target of $174 suggests overbought conditions and could lead to consolidation unless the price dips below the 100-hour MA. The broader market appears cautious, while the tech-heavy index moves forward, driven by a few large-cap stocks. The CBOE Volatility Index, or VIX, is near a historical low of 13, indicating that traders are not anticipating significant risks in the overall market. This low volatility makes buying protective puts on major indexes like the S&P 500 more affordable as a hedge for portfolios. The semiconductor sector remains the main driver, and derivative strategies should focus here. The PHLX Semiconductor Index (SOX) has risen over 30% this year, confirming the leadership mentioned. A recent 10-for-1 stock split by the sector’s largest company, effective June 10th, will increase liquidity and may draw more retail option traders into the chip market.

Technical Analysis and Strategies

For the highlighted chipmaker, the technical outlook recommends a careful but optimistic approach as it faces a key resistance level. The stock is in a strong uptrend above its important moving averages. Using bull call spreads could be effective, which involves buying a call option and selling another at a higher strike price to lower initial costs while betting on a price increase. For those anticipating near-term consolidation due to overbought conditions, selling options could be another strategy. Selling cash-secured puts at a strike price below the rising 100-hour moving average could work well. This allows traders to collect premiums while waiting for a potential price drop to a stronger support level. Historically, when a stock consolidates closely below a significant resistance level, it often precedes a significant price movement. Traders should monitor the stock’s implied volatility for any notable changes. A rise in volatility might indicate that a breakout or breakdown is coming, creating opportunities for strategies like straddles, which profit from large price swings in either direction. Create your live VT Markets account and start trading now.

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The US Dollar climbed to new weekly highs above 138.40, thanks to recent trade agreements involving the US. These deals have raised expectations for the Federal Reserve to maintain high interest rates for a longer time, which is helping the dollar gain strength. US and European leaders have reached a new trade framework similar to a recent deal with Japan. European products will now face a reduced tax of 15%, down from 30%. Meanwhile, the EU plans to invest EUR 600 billion in the US, which will boost purchases of US natural gas and military equipment.

Federal Reserve Financial Insights

Financial markets are being careful as they await the Federal Reserve’s decision. While many expect interest rates to stay the same, solid job figures and positive economic growth projections may lead to some cautious adjustments in rates. Japan’s monetary policy is not likely to change soon, even though the Bank of Japan is considering raising interest rates. The Bank is expected to keep its current approach until it better understands the impact of tariffs on growth. This situation is unlikely to significantly affect the Japanese yen. Central banks work to stabilize prices by adjusting interest rates to manage inflation or deflation. They announce their decisions through scheduled statements, aiming to maintain economic balance without causing big market fluctuations. The rise of the US Dollar is a key trend to watch. Derivative traders might consider positioning for further strength, especially through call options on dollar-centric pairs. The new trade frameworks provide strong reasons for this upward movement.

Strategic Currency Developments

The Federal Reserve’s cautious approach is backed by recent data showing a strong job market, with 272,000 jobs added in May—well above expectations. As inflation remains persistent and above the central bank’s target, the likelihood of continuing high rates increases. This reinforces the idea that holding dollar-denominated assets is a smart choice. Japan’s monetary policy is expected to stay accommodating, which contrasts sharply with the US approach. This difference has historically led to significant gains in the USD/JPY pair, a trend that gained momentum after 2022. Thus, using derivatives to bet against the yen in favor of the dollar seems like a solid strategy. The agreement involving European leaders also deserves attention. A stronger dollar typically leads to a weaker Euro. The European Central Bank’s recent decision to cut its key interest rate in early June, while the US maintains its rates, increases this currency divergence. Therefore, we recommend exploring put options on the EUR/USD pair to take advantage of this growing policy gap. As markets wait for upcoming central bank announcements, we expect an increase in implied volatility, making options more costly but also more effective. Traders could manage risk by purchasing options contracts before the announcements, allowing them to capture potential sharp movements in the market. This strategy offers defined risk while aiming at the anticipated market shifts. Create your live VT Markets account and start trading now.

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The US Dollar (USD) is expected to trade between 7.1530 and 7.1730 against the Chinese Yuan (CNH). Previously, it was thought the USD would range from 7.1440 to 7.1630, but it has already reached a high of 7.1706. Long-term analysis shows that the downward trend of the USD is losing steam. If it breaks above 7.1730, a decline to 7.1295 is less likely. Recently, the USD peaked at 7.1706 and then stabilized at 7.1686, reflecting a small gain of 0.19%.

Investment Risks and Considerations

Be aware that forward-looking statements come with risks and uncertainties. The information provided does not serve as a recommendation for trading assets. Investing involves risks, including the potential loss of funds. Always conduct thorough research before making any financial decisions. The details shared may not be error-free or precise, and investing in open markets carries various risks. Given the upward shift in the trading range, we think that derivative strategies should now focus on dollar strength against the yuan. The market has broken above the previous upper range, signaling that bearish bets on the dollar are becoming riskier. This suggests a need to move away from strategies aimed at a decline to 7.1295. This view is backed by recent economic data from China, which shows a mixed recovery. While industrial output grew a strong 6.7% year-over-year in April 2024, retail sales only increased by 2.3%, falling short of expectations and indicating weak consumer demand. This economic softness puts pressure on the yuan, making a stronger dollar more likely.

Federal Reserve and Policy Divergence

Meanwhile, the US Federal Reserve’s commitment to keeping interest rates high boosts the dollar’s attractiveness. Even though US inflation for April slightly decreased to 3.4%, the significant interest rate gap between the US and China continues to drive capital into the dollar. We believe this policy divergence is crucial for supporting a higher USD/CNH exchange rate. We recommend traders consider buying USD call options with strike prices just above the 7.1730 resistance level. This strategy allows participation in a potential upward breakout while limiting maximum risk. It aligns with the fading downward momentum discussed in the analysis. Historically, a strong break of a key technical level in this pair often leads to increased volatility. Therefore, we might also explore strategies that benefit from larger price movements, regardless of direction but with a bullish tilt. The goal is to prepare for the end of the recent consolidation and the beginning of a new upward trend for the dollar. Create your live VT Markets account and start trading now.

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The U.S. Treasury recently sold $70 billion in 5-year notes, with a high yield of 3.983%. At the auction, the WI level was 3.975%, resulting in a tail of +0.8 basis points. This compares to a 6-month average of -0.3 basis points. The bid-to-cover ratio was 2.31x, which is lower than the 6-month average of 2.39x. Direct buyers made up 29.5%, exceeding the 6-month average of 18.9%, while indirect buyers accounted for 58.28%, which is below the 6-month average of 70.1%.

Dealer Participation

Dealers participated at a rate of 12.23%, just above their 6-month average of 11.0%. In last week’s 20-year note auction, international buyers matched the 6-month average, unlike recent trends. Domestic buyers have stepped in to balance the lower international participation, but this shift affects the overall demand and performance of the auctions. Based on the auction data from Michalowski, we expect interest rates to rise in the short term. The weak demand, indicated by the positive tail and low bid-to-cover ratio, shows that the market struggles to take on the amount of debt currently being issued. This suggests that bond prices may drop, requiring higher yields to attract buyers in future auctions. This trend isn’t just a one-time event. The U.S. Treasury’s auctions for $44 billion in 2-year notes and $28 billion in 7-year notes in late May 2024 also experienced weak demand, with both indicating that yields must increase to sell all the debt. This pattern across various maturities strengthens the notion that the market is becoming flooded with U.S. debt.

Government Borrowing and Debt

The main issue lies in the scale of government borrowing. The Congressional Budget Office predicts that federal debt held by the public will reach 99% of the nation’s GDP by the end of 2024 and continue rising. With such a vast supply, it’s reasonable to expect that investors will seek better compensation, leading to higher yields. As a result, we are positioning ourselves for rising interest rates in derivative markets. This strategy includes shorting 5-year and 10-year Treasury futures or buying put options on bond ETFs like IEF. The ongoing weak auction results strongly indicate that holding bearish bond positions is a sound choice in the coming weeks. Decreased interest from foreign buyers, as shown by the low indirect bids, also affects the U.S. dollar. Less foreign demand for our bonds means less demand for dollars to buy them. Historically, a decline in foreign interest in U.S. debt has preceded dollar weakness, making bets against the dollar an appealing secondary strategy. The current uncertainty suggests increased interest rate volatility as well. The CME FedWatch tool shows that markets are expecting the Federal Reserve to maintain its current stance, creating tension as weak economic data conflicts with ongoing inflation. In this environment, buying options that benefit from significant rate changes, like straddles on Treasury futures, is a wise strategy to guard against sudden market shifts. Create your live VT Markets account and start trading now.

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