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Bessent warns against focusing too heavily on a single inflation number, highlighting trends and past mistakes by the Fed.
US Treasury Secretary Scott Bessent stressed the need to look at inflation trends instead of fixating on any one number. He mentioned that inflation isn’t speeding up, and he hadn’t yet seen the day’s Consumer Price Index figures. Bessent also acknowledged President Trump’s statement that he wouldn’t dismiss Federal Reserve Chair Jerome Powell, despite previous forecasting mistakes by the Fed.
Bessent highlighted the importance of an independent central bank in shaping policy and noted that the process to find Powell’s successor has begun. He pointed out that there are many qualified candidates, both from within and outside the Federal Reserve, but the decision will happen at Trump’s preferred pace.
US CPI forecasts cluster around 2.9-3.0% year-over-year and 0.2-0.3% month-over-month
The range of expectations plays a key role in how the market reacts. When actual outcomes differ from these expectations, it can lead to surprises. Additionally, where these forecasts cluster can provide useful context for market reactions.
Forecast Clusters and Market Surprises
Forecasts can sometimes cluster at one end of the expected range. This means that even outcomes close to the lower end can still be surprising. For the Year-on-Year Consumer Price Index (CPI Y/Y), 47% of forecasts predict a rate of 2.7%, which is the consensus figure, while other estimates range from 2.4% to 2.8%. For the monthly Consumer Price Index (CPI M/M), the consensus is set at 0.3%, representing 65% of forecasts, with other predictions varying between 0.1% and 0.4%. The Core CPI Y/Y consensus stands at 3.0%, accounting for 49% of all forecasts, with predictions ranging from 2.8% to 3.1%. The Core CPI Month-on-Month (M/M) has a consensus of 0.3% from 66% of forecasts, while the rest predict between 0.1% and 0.4%. Core figures are particularly important, as most forecasts cluster around 2.9-3.0% for Y/Y and 0.2-0.3% for M/M. If actual figures differ significantly, we can expect strong market reactions due to little expectation for major fluctuations. Given this forecast distribution, traders in derivatives have a clear path ahead. We are not just facing a simple event; instead, we anticipate considerable volatility as the market is tightly grouped around a narrow consensus. The clustering of these forecasts indicates high confidence, which ironically makes deviations from the consensus more painful, rather than confirmations.Positioning and Strategy for Market Volatility
Here’s how we plan to position ourselves. The analysis points to the importance of the Core M/M figure. With 93% of economists predicting a rate between 0.2% and 0.3%, any result outside this range could trigger significant movements. This is heightened by the context of recent data. The May jobs report showed a surprising increase of 272,000 jobs, far exceeding expectations and delaying anticipated rate cuts. This adds pressure to the upcoming inflation report. If inflation also exceeds expectations, it could reshape views on a resilient, yet possibly accelerating economy, leading to a sharp adjustment in the rates market. We know that Powell is focused on this data. As a result, buying volatility seems very appealing. The VIX index has been trading in the low 12-14 range, making options relatively affordable. We see value in purchasing near-term straddles or strangles on the S&P 500 or Nasdaq 100 ETFs ahead of the data release. The market is displaying complacency that does not reflect the potential for unexpected results. A Core M/M print of 0.4%, which only 4% of forecasters expect, would not just be a surprise; it would strongly challenge the prevailing disinflation narrative, likely causing risk assets to drop sharply and bond yields to rise. This represents a tail risk that options are currently not pricing correctly. On the flip side, the risks are unbalanced. A Core M/M print of 0.2%, while falling short of expectations, is predicted by over a quarter of economists. This would be a positive surprise for the market, likely reinstating interest in a September rate cut, which the CME FedWatch Tool currently assesses as a 50/50 chance. However, this movement would probably be less drastic than a surprise on the upside, as it aligns with the desired disinflation trend. The real value lies in the extremes of the distribution. We can look to past events for guidance. In September 2022, a Core CPI result just 0.1% higher than consensus led to a more than 4% drop in the S&P 500 in just one day. The current market feels much more optimistic, making it similarly susceptible to a shock. Therefore, our strategy is not about betting on a certain direction but rather on breaking away from this tightly held consensus. We aim to either profit from a spike in volatility following the data release or step into a directional trade once a new trend forms. The market has outlined a clear path; the biggest risk is assuming the consensus is always right. Create your live VT Markets account and start trading now.Traders weigh US tariff threats while USD/CAD stays stable before inflation data release
USD/CAD is currently stable as traders analyze the US’s tariff threats to the EU and Mexico. They are also waiting for inflation data. The US Dollar sits at about 1.3690 against the Canadian Dollar with a 30% tariff threat on imports affecting market mood.
Possible tariffs of 35% on Canadian goods and 50% on copper exports to the US could hurt Canada’s export sector. However, positive employment data has eased worries about potential rate cuts from the Bank of Canada in July.
Upcoming Inflation Reports
On Tuesday, Canada will release its Consumer Price Index (CPI), which will shed light on inflation and influence decisions made by the central bank. At the same time, the US will publish its inflation data, with expectations for a 3% increase in core CPI for June. A higher US CPI could strengthen the US Dollar by affecting the Federal Reserve’s interest rate choices, which in turn influences the USD/CAD outlook. Technically, USD/CAD is near the 20-day SMA at 1.3670, with resistance at the 50-day SMA around 1.3745. The Relative Strength Index is at 51, indicating neutral momentum. A drop below 1.3670 could lead to further declines, depending on inflation outcomes. A strong Canadian CPI might boost the Loonie, pushing USD/CAD lower. Given the current standoff, we see the next few weeks as a time for active strategies instead of passive observation. The scene has shifted since this analysis was first written. Critical Canadian inflation data has come in, altering the entire outlook. Statistics Canada reported on June 25th that the annual inflation rate unexpectedly dropped to 2.8% in May. This supports a higher chance of a rate cut from the central bank, with money markets now estimating over a 70% likelihood of a cut by the September meeting, fundamentally weakening the Loonie’s outlook.Impact of Monetary Policy Divergence
At the same time, the situation in the US provides a sharp contrast. The recent US inflation report showed the core CPI stubbornly holding at 3.4% year-over-year for June, surpassing predictions. This supports the Federal Reserve’s careful, data-driven approach and pushes potential rate cuts further away. This growing difference in monetary policy is the key focus for us. The US Dollar’s yield advantage is widening, offering strong support for this currency pair. Thus, our strategy is to view the current tight range not as neutrality, but as a base for a possible upward movement. We see the 20-day simple moving average as a support level rather than a midpoint. For traders looking for a breakout, buying call options with strike prices just above the 50-day SMA, targeting levels like 1.3800 or 1.3850, looks attractive for its risk-reward profile. This strategy allows participation in a potential rally driven by the widening interest rate gap, while also defining risk to the premium paid. The backdrop of trade tariffs adds volatility. We recall the unpredictable swings of the 2018-2019 trade disputes. While we don’t expect immediate action, the persistent threat of tariffs before the 2026 USMCA review suggests that maintaining some longer-dated volatility through options could be a wise hedge against unexpected political events. Any aggressive remarks could easily push the pair past technical resistance levels. For now, we’re focusing on the recent weak Canadian data and strong US data as our main signals, setting up for a move that aligns with the clear divergence in central bank outlooks. Any dip towards the 1.3670 level should be viewed as a chance to build a long position, as the underlying support for the US Dollar in this pair is now significantly stronger. Create your live VT Markets account and start trading now.EU spokesperson says trade countermeasures won’t happen until after August 1 as discussions continue
The EU Trade Commissioner, Sefcovic, will talk with the US Trade Representative, Greer, this evening. The EU has stated that no trade countermeasures will be implemented before August 1.
German Chancellor Merz is pushing for a quick resolution and is in close contact with Trump and Von Der Leyen. Although the EU is not taking countermeasures at this time, they are ready to act if needed.
Market Reactions To Tariffs
The market has largely ignored the threat of a 30% tariff on the EU, thanks to the August 1 deadline. Initially, markets fell but then rebounded, as they are used to Trump’s threats. Many expect that deadlines will extend and agreements will eventually be reached. Trump’s threats seem ineffective unless he imposes tariffs immediately, which could upset the market and lead to retaliations. The market’s relaxed response is a signal for us. While cash traders are buying dips based on reassurances from Merz and the EU spokesperson, the derivatives market provides a smarter strategy. Current complacency from “TACO trade” fatigue has lowered implied volatility. For example, the VIX index is hovering around 13, a level that suggests little concern for short-term disruptions. This presents an opportunity.Mispricing The Probability
We believe the market is underestimating the chance of a policy mistake. Everyone is fixated on the August 1 deadline, expecting a slow, straightforward negotiation between Greer and Sefcovic. The actual risk lies not in scheduled events, but in unpredictable incidents. Between 2018 and 2019, a single tweet could wipe out a week’s worth of gains. During that time, markets averaged a 1.5% drop within 24 hours after a new tariff threat, but today’s complacency is much greater. As a result, we are not interested in the popular strategy of selling volatility. The returns simply don’t justify the risk of a sudden downturn. Instead, we recommend buying inexpensive, out-of-the-money protections. With the VIX remaining low, we see hints of underlying anxiety. The CBOE Skew Index, which gauges demand for protection against unexpected events, has been rising, recently reaching 138. This suggests while many are selling options, a few large investors are buying “lottery ticket” puts, just in case. Our plan for the next two weeks is to take advantage of this disconnect. We will create trades that benefit from a sudden rise in volatility rather than a specific market direction. This means buying August and September call options on the VIX and purchasing far out-of-the-money put spreads on indices very sensitive to this situation, like Germany’s DAX. Right now, the cost of entering these positions is quite low. The market seems to favor a rational Trump, as Von Der Leyen and Merz hope for, rather than an unpredictable leader who uses tariffs disruptively just to show strength. The more the market ignores these risks, the more alert we should be. Create your live VT Markets account and start trading now.S&P 500 closes lower ahead of earnings season amid tariff concerns
On Friday, the S&P 500 index dropped 0.33% due to uncertainties around tariffs. Over the weekend, news of potential new tariffs on Europe caused a steep decline in S&P 500 futures. However, concerns have eased, and the index is expected to open only 0.2% lower.
Now, the focus is shifting to corporate earnings, with major banks set to release their reports tomorrow. Important Consumer Price Index (CPI) data will also influence trading on Tuesday. According to last Wednesday’s AAII Investor Sentiment Survey, 41.4% of individual investors feel positive about the market, while 35.6% feel negative.
Market Movement Review
Last week, the S&P 500 closed down 0.31%, following a 1.7% increase the week before. Support is found around 6,150, while resistance is at 6,300. The Nasdaq 100 decreased by 0.21% on Friday, continuing its short-term consolidation within an uptrend. The Volatility Index (VIX) fell to 15.70 on Thursday, indicating strong markets, but rose back to 17.24 on Friday. A lower VIX suggests less market fear, while a higher VIX indicates possible upward movements. S&P 500 futures are trading near 6,300 after dipping to 6,258 due to geopolitical news. Resistance is at 6,320 and support is at 6,250. Crude oil rose by 2.82% on Friday, with further gains today, trading above $69 due to supply concerns. The S&P 500 is likely to open slightly lower amidst geopolitical tension, but there is excitement around the earnings season and CPI data. Currently, the market is in a cautious phase. This is not the time for broad predictions but for targeted, catalyst-driven investments. Anxiety over European tariffs is minor compared to the significant corporate earnings and inflation data that are approaching. For derivative traders, this environment focuses on positioning for short-term market reactions rather than long-term trends.Key Events and Strategies
First, we must focus on the banks. Their reports kick off the earnings season, but the real insight will come from details about net interest margins versus their investment banking and trading success. This mix makes simple bets risky. Instead, we are considering straddles or strangles on important financial ETFs, aiming to profit from an unexpected price swing once the details are revealed. The stakes are high, with FactSet estimating S&P 500 earnings growth at a strong 9.0% year-over-year. Any major change from this estimate will affect the market. Also, the upcoming CPI release is one of the most crucial data points this month. After the May CPI report came in cooler than predicted at 3.3%, the market has grown hopeful for Federal Reserve action. According to the CME FedWatch Tool, futures markets now suggest nearly a 65% chance of a rate cut by September. This week’s inflation data will either confirm or challenge that prediction. A high number would drop those odds and likely lead to a decline in equity futures, making protective puts a smart, low-cost investment. A low number could strengthen the case for a September rate cut and spark a rally, favoring short-term call options. The recent increase in the VIX gives us insight. A VIX below 15 usually means complacency, but its recent rise toward 17 indicates that traders are starting to factor in upcoming uncertainty. This is a prime opportunity. Volatility is high enough to signal potential, yet option prices remain reasonable. This is the right time to buy options ahead of the earnings and CPI announcements. Historically, implied volatility tends to increase before significant events and then drops sharply afterward. This pattern suggests purchasing options now rather than holding them through a calm period. Lastly, crude oil’s recent rise, over 8% in the past month to above $81 a barrel, complicates matters. This increase creates a challenge for a cooling inflation narrative. It adds tension that reinforces our main strategy: the market is balanced precariously, and the smart choice is not to predict the direction it will take, but to be prepared to benefit from its movement. Create your live VT Markets account and start trading now.The Euro rises against the Pound because of weak UK data and the Bank of England’s position
The Euro gained value against the British Pound on Monday due to weak economic data from the UK and comments from the Bank of England that suggest a softening of their monetary policy. At the same time, the Euro stayed stable amid ongoing trade tensions between the European Union and the United States.
The EUR/GBP pair traded at about 0.8710 during early U.S. trading hours, close to a two-week high. The UK’s GDP unexpectedly fell by 0.1% in May, raising concerns about the country’s economic health, especially following a 0.3% decline in April.
Impact on UK Key Sectors
This decline has affected important UK sectors like manufacturing, industrial production, and construction, although the services sector showed some growth. Bank of England Governor Andrew Bailey highlighted a downward trend for interest rates and pointed out emerging “slack” in the economy. The UK labor market is also slowing down. A recent KPMG-REC survey revealed that the rate of available workers is increasing at the fastest pace since late 2020, indicating reduced hiring demand. Permanent job vacancies dropped significantly, and unemployment rose to 4.6% from February to April. The gloomy UK economic outlook and fiscal pressures are increasing the likelihood that the Bank of England will consider further rate cuts. Current market estimates indicate a 90% chance of a rate cut in August, with possible reductions amounting to 75 basis points over the year.Market Perspective and Trading Strategy
Upcoming inflation data from the UK and Eurozone could shift market expectations and affect the EUR/GBP exchange rate. Weak UK inflation might strengthen the case for more cuts from the Bank of England, while stable Eurozone inflation could support the European Central Bank’s cautious stance. Given the clear divergence in economic conditions, traders should prepare for continued Sterling weakness against the Euro. The situation is straightforward; there is a fundamental difference in economic momentum and central bank signals. Weak UK output data and a cooling labor market create a strong backdrop for this expectation. Bailey’s dovish comments reflect a struggling economy, often a precursor to monetary easing. We need to take advantage of this policy divergence before it becomes fully reflected in prices. We should concentrate on the upside for EUR/GBP. The recent UK inflation report showed the CPI for May falling to exactly the Bank of England’s 2.0% target for the first time in nearly three years, which serves as a green light for the central bank. Conversely, Eurozone inflation rose to 2.6% in May, explaining why the ECB will be patient after its small initial cut. This widening policy gap drives our trading strategy. Looking back at the period after the Brexit vote from 2016 to 2017, we saw how differing policies pushed EUR/GBP from below 0.7700 to above 0.9200. While we don’t predict such a drastic move, it highlights how impactful this theme can be. Thus, we aim to use the options market to manage risk while taking advantage of potential gains. We plan to buy EUR/GBP call options that expire after the Bank of England’s August meeting. With the pair testing the 0.8700 level, we prefer strikes around 0.8750 and 0.8800. These options provide an attractive risk-reward ratio; if the pair breaks above the recent two-week high, it is likely to continue rising quickly. Volatility works in our favor; the upcoming inflation data from both regions will certainly create movement in the market. Buying calls lets us profit from both the anticipated direction and a spike in volatility around these key reports. Currently, market forecasts suggest more than a 65% chance of an August rate cut from the Bank of England, a number that has firmed after the latest inflation report. Our opportunity to act is in the coming weeks, while there is still some uncertainty. We will keep a close eye on the final UK CPI release before the August decision, as this will be the key driver. Create your live VT Markets account and start trading now.Interest rate expectations stay stable as traders await US CPI data to guide future decisions.
Recently, the market has remained stable as traders wait for the US CPI data. The NFP report brought clarity, suggesting two potential rate cuts as the likely scenario.
Impact Of Upcoming CPI Data
The upcoming CPI data could change market expectations, but only if the numbers differ significantly from what people expect. If the data matches expectations, it probably won’t change prices much. By the end of the year, rate cuts are expected: – Fed: 48 basis points, with a 95% chance of no change at the next meeting. – ECB: 23 basis points, with a 97% chance of no change. – BoE: 58 basis points, with an 89% likelihood of a rate cut. – BoC: 21 basis points, with an 87% chance of no change. – RBA: 56 basis points, with an 80% likelihood of a rate cut. – RBNZ: 33 basis points, with a 72% chance of a rate cut. – SNB: 9 basis points, with an 85% chance of no change. For rate hikes, the BoJ expects a 14 basis point increase, with a 99% probability of no change at their next meeting. The current calm in the market is an opportunity. This calm isn’t stability—it’s the buildup before a sudden movement. While the NFP data brought expectations back in line, the upcoming US CPI report is the true test. The forecast is for headline CPI to cool to a 3.4% annual rate and core inflation to drop to 3.6%. Any deviation from these numbers will likely cause a big reaction. If the numbers are as expected, it just postpones the next move, but a surprise will quickly change positions.Mispricing In Volatility
We see the biggest mispricing right now in volatility. The VIX index, currently around 13, doesn’t seem to reflect the risk of a market-moving CPI surprise. This reminds us of mid-2022, when low VIX levels exploded after higher-than-expected inflation data caused a swift drop in equities. While Fed officials like Williams speak cautiously, we notice the strong hawkish stance from voting members like Kashkari, who highlighted that the central bank isn’t ready to declare victory over inflation. This tension within the Fed isn’t shown in the current low volatility. In response, we plan to buy volatility, focusing on short-dated straddles and strangles on major indices ahead of the data release. This strategy allows us to profit from the size of the move rather than the direction, which is where we see market complacency. Looking at global markets, the expectation of 58 basis points in cuts from Bailey seems overly optimistic. Recent UK wage growth remains stubbornly high at 6.0%, an important metric for the Bank of England. This persistent figure indicates that their path to cutting rates is more complex than the market assumes, making derivatives that bet against such aggressive cuts attractive. Similarly, the 23 basis points priced for the ECB may not fully account for their caution. With Eurozone core inflation remaining sticky at 2.7%, well above their target, policymakers have little reason to hurry. The real divergence is with the Bank of Japan. Though only 14 basis points of hikes are anticipated, the yen continues to weaken, with the dollar recently exceeding ¥156. This ongoing weakness, along with Japan’s core inflation reaching 2.2% in March, raises the chance of a significant policy shift sooner than expected. The risk-reward for trades betting on a more hawkish surprise from the BoJ is becoming increasingly attractive. Create your live VT Markets account and start trading now.Germany’s ZEW current conditions improve as economic sentiment rises, showing optimism despite uncertainties.
Germany’s ZEW current conditions index for July is at -59.5, which is better than the expected -66.0 and an improvement from the previous -72.0.
Economic sentiment has risen to 52.7, exceeding the forecast of 50.3 and up from 47.5.
German Economy Outlook
Despite global uncertainties, about two-thirds of respondents believe the German economy will continue to improve. Optimism is fueled by hopes for a quick resolution to the US-EU trade dispute and government economic support from Germany. Low’s report is clarifying the signals for derivatives traders. The focus isn’t just on the negative current conditions number everyone can feel; the real insight lies in the significant difference in forward-looking sentiment. This is a classic “look-through” market where participants are ignoring current challenges, expecting future gains. For traders, this suggests a strategic move into bullish positions on German stocks, especially for the upcoming months. The strategy is to buy call options on the DAX index with September or October expirations. Why options? The current conditions at -59.5 remind us that underlying issues remain. Holding long futures carries too much risk if the expected government support does not materialize. Call options let us limit our risk while still allowing exposure to the recovery that many ZEW respondents believe in. We’ve seen this playbook before; after the initial pandemic shock in March 2020, ZEW Economic Sentiment jumped from -49.5 to +28.2 in April, long before recovery was confirmed. The DAX rose over 30% in the following three months. The current sentiment rise from 47.5 to 52.7 reflects a similar, though less dramatic, trend.Trading Strategy
Additionally, implied volatility on the DAX, shown by the VDAX-NEW index, has likely been high due to a series of poor data reports. Recent readings are around 14.8. As positive sentiment strengthens and the “bad news” gets fully priced in, we expect this volatility to decrease, making long option strategies cheaper and more effective. The German economy’s well-known struggles in manufacturing, with steady weakness in industrial production over the past year, have created a buildup of potential. The market is betting on this tension being released, driven by hopes of resolving the trade dispute and providing fiscal support. A more aggressive strategy could involve buying EUR/USD call options, as a recovery in Germany would likely strengthen the Euro. Create your live VT Markets account and start trading now.Beth Hammack describes the economy as fundamentally strong despite persistent inflation above the Fed’s target
Beth Hammack from the Federal Reserve Bank of Cleveland talked about the economy’s current condition. She emphasized its strength, even with inflation still being a challenge. Although inflation is moving closer to the target, it is still high, which means the Federal Reserve must maintain strict monetary policy.
Hammack mentioned that there’s an ongoing discussion among Fed officials about the economic outlook and recognized the uncertainty surrounding business plans and investments. It’s unclear whether the economy will grow in the future or how tariffs might affect it.
Fed Interest Rate Stance
She observed that the Fed is near a neutral interest rate and does not see an immediate need to change rates. However, she is prepared to adjust if economic conditions weaken. In financial markets, Bitcoin reached new highs over $122,000, showing strong growth. The EUR/USD pair pulled back to the mid-1.1600s due to concerns about trade between the US and EU, especially with potential US tariffs. Gold held steady around $3,350 amidst new tariff threats, while GBP/USD struggled, aiming for 1.3400 due to budget issues and trade tensions. According to Hammack, the strategy for the coming weeks should focus on managing volatility and policy differences. Her insights align with our expectations: a prolonged period of uncertainty where the Fed is influenced by mixed data. This isn’t a time for bold moves; instead, it calls for careful, risk-defined strategies.Economic Tension Points
The main conflict is between a strong economy and persistent inflation. Hammack highlighted the economy’s strength, supported by a recent jobs report showing 272,000 new jobs in May, far exceeding predictions. However, the Consumer Price Index remains high at an annualized 3.3%, keeping the Fed cautious. This back-and-forth creates a tense atmosphere. The VIX index recently dropped below 13, a low level historically, making it an excellent chance to invest in volatility. We’re not buying direct futures but are looking into long strangles on major indices, expecting a sharp movement in either direction when the Fed is forced to act. This policy inaction in the U.S. amplifies opportunities in FX derivatives. While the Fed pauses, the European Central Bank recently cut its key rate by 25 basis points. This change increases the interest rate gap and pressures the euro. We view any EUR/USD strength back towards 1.0900 as a chance to buy put spreads, anticipating a move back to the year’s lows. Similarly, with UK inflation higher than in Europe, the Bank of England faces challenges, making GBP/USD susceptible. We expect it to drift towards 1.2600, a scenario we can play with options to manage risk amidst political uncertainties. Hammack’s remarks about tariff uncertainty signal that safe-haven assets are vital. Gold’s price around $2,320 per ounce appears steady, suggesting the market is taking a moment. Global central banks are not waiting for clearer signals; they purchased a record 1,037 tonnes of gold last year and added over 290 tonnes in the first quarter of 2024. We plan to buy more gold on dips using call options, betting that any increase in trade tensions will drive investors back to gold. In digital assets, the momentum is clear and reflects a shift to safety amid monetary policy uncertainty. Although Bitcoin isn’t at overly speculative levels, its recent rise above $71,000 is noteworthy. The key figure for us is the inflow into Bitcoin ETFs, which have garnered over $15.6 billion since launching in January. This indicates growing institutional interest. We approach this by using options for long exposure, leveraging high implied volatility to sell puts at significant support levels, effectively allowing us to wait for the right entry point. Create your live VT Markets account and start trading now.In May, Canada’s wholesale sales saw a surprising monthly increase of 0.1%
Canada’s wholesale sales for May went up slightly by 0.1% compared to April. This was better than the expected drop of 0.4%.
The movements in currency pairs and commodity prices show a shaky market. The Australian Dollar fell to the 0.6550 level, influenced by the strong US Dollar and rising trade tensions.
