UK Chancellor Rachel Reeves may introduce a windfall tax on commercial banks to boost revenues. This tax would target profits generated from taxpayer-funded deposits at the Bank of England. The Institute for Public Policy Research estimates this could raise £32.3 billion over this five-year parliamentary term, giving Reeves an extra £3.6 billion to work with. The think tank also suggests that the Bank of England should stop its active gilt sales. They believe this could save over £10 billion each year and cut interest costs by £1.1 billion in 2029-30.

Government Revenue Strategies

The UK government is considering several options to increase revenue. The idea of a windfall tax on banks poses risks for the UK financial sector. Traders may want to buy put options on major UK banks like Barclays and Lloyds, as well as on the broader FTSE 100 index. This would protect against potential losses if banking profits suddenly decline. This potential tax isn’t unexpected; banks reported strong net interest margins in their Q2 2025 earnings, thanks to the higher interest rates that have been in place since the early 2020s. These profits make banks an attractive target for the government, especially with the UK’s debt-to-GDP ratio close to 100%, as reported by the OBR. The political pressure is increasing, suggesting that this tax could be implemented before the next budget.

Potential Policy Shift

The suggestion that the Bank of England might stop its gilt sales indicates a significant change in policy. This could lead to higher prices for UK government bonds and lower yields. Traders should consider buying long-dated gilt futures and may also see more activity in interest rate swaps, as market participants position themselves to receive a fixed rate in anticipation of a more accommodative central bank. Such a shift from the Bank of England could weaken the British pound. Halting gilt sales would make UK assets less appealing to foreign investors looking for better yields, which could put downward pressure on the pound. Traders may respond by shorting GBP/USD futures or buying options that profit from a decline in the currency. Overall, these discussions around fiscal and monetary policy create a climate of high uncertainty. The FTSE 100 Volatility Index (VFTSE) has recently risen to 18.5, reflecting anxiety about government and central bank actions. In this scenario, strategies like buying straddles on bank stocks may be useful, allowing traders to capitalize on significant price movements in either direction once a decision is made. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The People’s Bank of China (PBOC) plans to set the USD/CNY reference rate at 7.1274, according to a report by Reuters. This rate is the daily midpoint for the yuan against various currencies, especially the US dollar, within the trading system. The PBOC operates a managed floating exchange rate system. This allows the yuan to fluctuate within a 2% range above or below the midpoint. Each morning around 0115 GMT, the PBOC establishes this midpoint, taking into account market demand, economic data, and movements in global currencies.

Exchange Rate Management

Under this system, the yuan can rise or fall by up to 2% from the midpoint each day. The PBOC can step in to stabilize the currency if it approaches the limits or if there are significant fluctuations, ensuring smoother changes in the yuan’s value. The expected USD/CNY midpoint of 7.1274 indicates that the PBOC is signaling a stronger yuan. This change shows growing confidence, especially since Q2 2025 GDP figures were stable at 5.1%, surpassing market predictions. This marks a clear improvement from the weaker levels seen throughout much of 2023 and 2024, when the currency consistently traded above 7.20. Considering the currency’s management within the 2% band, this stronger rate suggests limited potential for the USD/CNY pair to rise in the short term. We see this as a chance to sell volatility, as the central bank is unlikely to allow sharp, unexpected drops from this new level. One-month implied volatility for USD/CNY has already decreased to 3.8%, and selling out-of-the-money call options on the pair could be beneficial.

Market Implications

This trend is supported by a general weakness in the US dollar. Recent US inflation data for July 2025 showed a calm rate of 2.7%. This has raised speculation that the Federal Reserve will keep interest rates steady for the rest of the year. This situation allows the PBOC to strengthen the yuan without conflicting with global market trends. Therefore, traders should be cautious when considering long positions on the USD/CNY pair, as both domestic policies and international factors could hinder progress. Reflecting on the property market issues from 2023 and 2024, the current policy seems aimed at attracting foreign investment by showing stability. While the interest rate difference still favors holding dollars, the yuan’s appreciation could soon offset that advantage. We expect traders to slowly start building positions that benefit from the yuan’s gradual strengthening over the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

In July 2025, Japan’s industrial production dropped by 1.6% from the previous month, which was worse than the expected 1.0% decline. This follows a rise of 2.1% in June. Compared to a year ago, industrial production fell by 0.9%, falling short of the anticipated 0.6% drop and down from a previous year-on-year increase of 4.4%. Retail sales showed a slight year-on-year rise of 0.3%, exceeding the expected decline of 0.2%. However, this increase was lower than last year’s growth of 1.9% and well below the forecasted 1.8%.

Projected Industrial Production

Looking forward, industrial production is expected to grow by 2.8% in August, higher than the earlier forecast of 1.8%. However, production for September is predicted to decline by 0.3%, changing from the previously expected increase of 0.8%. The July 2025 economic data points to an unexpected slowdown. Industrial output dropped more than anticipated, and retail sales barely increased, indicating that the Japanese economy is losing momentum as autumn approaches. Due to this economic weakness, we think the Bank of Japan will likely hold off on raising interest rates for the rest of the year. The interest rate difference with other countries is significant, especially since the 10-year US Treasury yield is steady at around 4.3%, much higher than Japanese bond yields. This situation may lead to a weaker yen, with the USD/JPY pair potentially testing its late 2024 highs. In equity derivatives, a weaker yen usually benefits the Nikkei 225 index by increasing the profits of Japan’s major exporting companies. We saw this pattern throughout 2024 when the index reached record highs, despite a sluggish domestic economy. Thus, buying call options on the Nikkei could be a wise move to take advantage of the contrast between a weak economy and a strong stock market.

Market Volatility and Investment Strategy

Future forecasts for industrial production are unstable, with an expected rebound in August followed by another decline in September. This suggests that market volatility may increase in the coming weeks. Traders should think about buying protection, such as Nikkei put options, to safeguard their long positions against sudden negative events. In the bond market, the weak data supports the argument for low Japanese Government Bond (JGB) yields. There is little pressure on the BOJ to tighten policy, so the demand for JGBs should remain steady. This solidifies the yen’s role as a funding currency for carry trades in the near future. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

Tokyo’s Consumer Price Index (CPI) for August 2025 rose by 2.6% compared to last year. This result met expectations but was lower than July’s increase of 2.9%. When we exclude fresh food, the CPI grew by 2.5% year-on-year, also matching forecasts but down from the 2.9% seen before. Excluding fresh food and energy—considered the core inflation—the CPI hit 3.1% annually. This is the highest level since January 2024. Consumer inflation has been above the Bank of Japan’s 2% target for over three years, along with steady increases in nominal wages.

Bank Of Japan Interest Rate Decisions

In January, the Bank of Japan (BOJ) raised short-term interest rates to 0.5%. Governor Kazuo Ueda has advised caution with further rate hikes, fearing economic downturns due to US tariffs. BOJ board member Nakagawa stressed the need for data-driven decisions, especially with the Tankan report expected in early October. Other economic signs showed Japan’s industrial output declined by 1.6% month-on-month in July, while retail sales grew by 0.3% year-on-year. The unemployment rate fell to 2.3%. In the US, interest rate cuts may be on the way, with Stephen Miran’s hearing set for September 4. The Bank of Japan and the US Federal Reserve appear to be on opposite paths. The Fed is considering interest rate cuts, while rising inflation in Japan pressures the BOJ to possibly raise rates again. This growing split in monetary policy is a key focus for trading in the coming weeks.

Monetary Policy Divergence

Inflation in Japan remains persistently above the BOJ’s 2% target, especially the core measure, which sits at 3.1%. Consumer prices have exceeded the target for over three years, prompting the January 2025 rate increase to 0.5%. Another hike seems likely before year-end. However, weak industrial output and retail sales show some economic weakness. BOJ members stress their decisions will rely on data, particularly the upcoming Tankan business survey expected around October 1st. A surprisingly poor Tankan result could delay the next rate hike. In contrast, the US is sending a clear message with Fed officials indicating it’s time to lower rates. This shift is supported by a steady decline in US core PCE inflation, which is now around 2.4%, close to the Fed’s target. Markets are confidently forecasting at least two rate cuts from the Fed by early next year. This policy divide suggests a weaker US dollar against the Japanese yen. We should plan for a lower USD/JPY exchange rate, using tools like options to manage risks around major data releases. Purchasing JPY calls or USD puts can help us profit from a strengthening yen while limiting downside risk. This outlook also applies to interest rate markets, where US and Japanese bond yields likely will converge. Falling US Treasury yields combined with rising Japanese Government Bond yields present trading opportunities. We can utilize interest rate futures to capitalize on this trend. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

## A High-Risk Warning A high-risk warning is out regarding foreign exchange trading because of the potential for high leverage and significant losses. It’s important for individuals to carefully consider their financial situation before getting involved in trading. InvestingLive emphasizes that it does not act as an investment advisor but provides economic and market information. It disclaims all responsibility for outcomes from using its content and advises readers to do thorough research before making investment choices. Advertising on the site may affect its compensation. ## The Message from the Federal Reserve The message from the Federal Reserve is getting clearer. Key figures, like Governor Waller, indicate it’s time to lower interest rates, signaling a shift towards a more accommodating policy. Fed funds futures show an 85% chance of a rate cut in September, suggesting that strategies benefiting from a weaker US dollar could be advantageous. In Japan, the situation is more complicated, which could lead to market volatility. With a tight job market and inflation consistently above 2%, the Bank of Japan seems poised to tighten its policies. However, today’s steep drop in industrial production and unexpectedly low retail sales give them reason to hold off. This growing gap between US and Japanese policies indicates a weaker USD/JPY exchange rate. We can position ourselves for this using derivatives, such as buying put options on the pair to profit from possible declines. Looking back, the Bank of Japan’s first rate hike in 2024 shows their cautious approach, suggesting they won’t rush to respond to mixed signals now. The uncertainty, especially regarding the Bank of Japan’s next steps, hints at increased market volatility. We’ve seen Japan’s 10-year bond yield rise to 1.15% as traders test the central bank’s commitment to maintaining easy money. Meanwhile, in the US, the possibility of lower interest rates makes long-dated Treasury futures and call options appealing as we trade in line with the Fed’s dovish shift. We must also consider the political pressures on the Federal Reserve, which adds another layer of unpredictability. The impending Senate hearing for Fed nominee Stephen Miran on September 4th is an essential event to keep an eye on. This could easily lead to short-term volatility in interest rate swaps and currency markets. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

Federal Reserve Governor Waller has shared plans to lower interest rates toward a neutral level, although it’s unclear when this will happen. He pointed out that there is no fixed timeline for these rate cuts to begin. Waller discussed tariffs, calling them a type of tax and suggesting that taxes do not automatically lead to inflation. While he recognized the high level of US debt, he does not see it as an immediate crisis, believing it can be addressed in future years.

Temporary Inflation

He described inflation as a temporary problem. Waller’s opinions may be influenced by a desire to be in line with former President Trump, perhaps with hopes of becoming the next Fed Chair. With a major Federal Reserve official hinting that interest rate cuts are on the way, we can expect a positive response in fixed-income markets. Traders might consider buying Treasury futures because bond prices typically rise when the Fed starts to ease its policies. The latest Core PCE report for July 2025 showed inflation easing to 2.5%, which supports the idea of starting the rate cuts. This hopeful outlook could boost the stock market, which has faced uncertainty since the interest rate hikes of 2022-2024. This is a good time to buy call options on major indices like the S&P 500. This sentiment is backed by the latest jobs report, showing a steady but non-inflationary payroll increase of 160,000, indicating a stable economy that can sustain corporate profits. The reduction in uncertainty around policy should help lower market volatility. The VIX index has been around 15, and we think it could drop further as the Fed’s direction becomes clearer. This situation is beneficial for strategies that gain from falling volatility, like selling VIX futures or setting up put spreads on volatility ETFs.

Weakening US Dollar

The Fed’s clear intention to cut rates will likely weaken the US dollar against other major currencies. We see a chance to short the Dollar Index (DXY), which seems to be peaking. A direct way to do this would be through currency futures or by purchasing call options on pairs like the EUR/USD, especially as other central banks appear more cautious about easing their policies. The Fed’s view of inflation as “transitory” suggests that it will allow slight price increases without changing its easing stance. While it’s noted that US debt is on an unsustainable path—predicted to surpass 108% of GDP this year—this issue is being framed as one for the future. This gives us confidence that long-term fiscal concerns won’t hinder the market’s positive response to lower rates in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The US Senate Banking Committee will have a hearing on September 4 for Stephen Miran, a Trump nominee for the Federal Open Market Committee (FOMC). The goal is to confirm Miran before the FOMC meeting on September 16 and 17. Miran is currently the chair of the president’s council of economic advisers. He shares the president’s views on monetary policy, advocating for lower interest rates. Miran believes tariffs don’t affect inflation and favors giving the president more control over the Federal Reserve, including the ability to fire its leaders without limitations.

Market Reaction To Upcoming Events

The market is getting ready for the FOMC meeting on September 16-17, with Miran’s confirmation hearing happening just before. A key question is whether political pressure will lead to a rate cut, even if the economic data doesn’t support it. The CME FedWatch Tool shows this uncertainty, indicating a 55% chance of a quarter-point cut, rising from only 30% last month. However, the push for a rate cut faces tough numbers that suggest the Fed should keep rates steady. The July 2025 CPI reading was 3.1%, still above the 2% target. The latest jobs report indicated some slowdown, with 160,000 jobs added, but this isn’t enough to change policy right away. Political tensions with the Fed usually cause market jitters, indicating higher volatility ahead. A simple strategy is to consider call options on the VIX, as this could benefit from increased uncertainty around the hearing and the FOMC meeting. This isn’t about choosing a direction but rather anticipating larger market swings in early September.

Investment Strategies And Implications

If you have a strong opinion about the outcome, interest rate derivatives are a direct way to play it. You can express your belief in the political pressure leading to a cut by using SOFR futures contracts for the upcoming months. On the other hand, if you think the Fed will stick to the data and not cut rates, you might want to consider options on bond ETFs like TLT. There’s also a larger issue regarding the Fed’s independence, which hasn’t faced such direct challenge since 2019. If the market starts to see the Fed as a political tool, it could weaken the US dollar in the medium term. Traders might look at call options on currency ETFs for the Euro or Swiss Franc as a hedge against this possibility. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

The Federal Reserve’s Waller is recommending that the US move interest rates towards a more neutral level. He prefers a 25 basis point cut at the upcoming September meeting and expects more cuts in the next three to six months.

Waller’s Thoughts on the Current Policy Rate

Waller considers the current policy rate to be somewhat restrictive, roughly 1.25 to 1.50 percentage points above neutral. He sees no need for a larger cut in September unless the August jobs report shows significant weakness, and he notes that inflation is still manageable. Waller aimed for a rate cut in July and feels even more strongly about it now due to weakening labor demand. He is worried about rising risks in the labor market. The next Federal Reserve meeting is set for September 16 and 17. A rate cut is expected, even with high inflation. After recent updates to labor force data from the Non-Farm Payroll report, expectations for a rate cut have increased. Currently, inflation, aside from temporary tariff effects, is around 2%. With Fed Governor Waller openly supporting a rate cut, the September meeting seems well-prepared for this decision. His comments indicate that the central bank wants to shift towards easier monetary policy, aiming for a more neutral stance before the economy weakens further.

Latest Jobless Claims Data

Recent data supports this shift. The weekly jobless claims report from August 28th showed a rise to 310,000, the highest number this year. This reinforces Waller’s concerns about increasing risks to the labor market, which will be a focus leading into the next jobs report. For traders, this strengthens predictions for lower rates, making SOFR futures for September and December appealing. As Waller expects more cuts in the coming months, we are also looking at contracts for early 2026. This approach is focused on preparing for several cuts, not just one in September. The options market also indicates increased activity ahead. With a rate cut nearly confirmed, the main question is how quickly future cuts will occur and how the economy will respond. We’re seeing more interest in purchasing options on interest rate-sensitive ETFs to benefit from the expected rise in market volatility around upcoming Fed meetings and economic data releases. This situation is similar to past easing cycles, such as the Fed’s changes in 2019 after tightening for some time. History shows that once the Fed starts cutting rates, it often continues for several months until economic data stabilizes. We anticipate a similar trend, especially following the aggressive rate hikes from 2022-2024. That said, inflation remains a concern. The latest core PCE report for July indicated a 2.6% year-over-year increase, which is still above the Fed’s 2% target. This presents a risk that the central bank might need to proceed more cautiously than Waller suggests. A notably strong inflation report could easily disrupt these dovish expectations. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

New Zealand’s consumer confidence fell by 2.9% in August, dropping the ANZ consumer confidence index from 94.7 in July to 92.0. This is the lowest level of confidence seen in ten months. People are feeling less positive about making major purchases for their homes.

Nzdusd Exchange Rate

Despite this drop, the NZD/USD exchange rate remains stable at around 0.5882. The decline in consumer confidence suggests that households are spending less, which could lead to lower retail sales in the coming months. This trend indicates that the economy may be losing momentum as we approach the end of the year. This report raises questions about whether the Reserve Bank of New Zealand (RBNZ) will need to keep interest rates high to manage inflation, which was last reported at 3.8% for the second quarter of 2025. With consumers holding back on spending, the RBNZ may have fewer reasons to increase rates from the current 5.75%. Traders might want to prepare for a more cautious central bank stance, as this data weakens the argument for aggressive policies.

Currency Market Opportunities

For currency traders, the lack of immediate reaction in the NZD/USD could be a chance to prepare for future declines. The outlook for the Kiwi dollar seems weaker, especially since the US Federal Reserve seems intent on keeping its rates steady. Buying NZD/USD put options with October or November expiry dates could be wise if you believe it will drop toward the 0.5700 level. We remember a similar situation in late 2022 when a significant drop in consumer confidence preceded a slowdown in GDP growth a couple of quarters later. This history suggests that the current decline in confidence may indicate a more serious economic slowdown rather than just a temporary issue. It supports a cautious or bearish approach to New Zealand-related investments. The fact that consumers are avoiding major household purchases is a clear signal to the retail and manufacturing sectors listed on the NZX 50. We anticipate increased volatility in these stocks as the market reacts to this news in the coming weeks. Therefore, using options to protect long equity positions or selling NZX 50 index futures might be a good strategy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now

Iran’s foreign minister has spoken with the EU’s foreign policy chief, stating that France, Germany, and the UK have no legal basis to reimpose sanctions on Iran. He highlighted Iran’s readiness to restart nuclear talks, but only if the other countries show genuine intention and goodwill. **Iranian Claims About UN Sanctions** He also argued that the E3’s efforts to revive old UN Security Council resolutions under Resolution 2231 are invalid and pointless. Oil traders are closely monitoring the situation in Iran, as rising tensions in the Middle East could lead to higher oil prices. The letter from Iran’s foreign minister brings uncertainty to energy markets. For derivative traders, this uncertainty often leads to higher volatility, which may cause option prices to increase in the upcoming days. The main question is whether this is mere diplomatic talk or a genuine sign of potential reductions in Iranian oil supply. For those who think this standoff will worsen, buying call options on crude oil futures is a smart way to prepare for rising prices. October or November WTI contracts with strike prices around $95 or $100 a barrel, currently trading near $88, could be appealing. This strategy offers significant upside if sanctions are reimposed, threatening the 1.8 million barrels per day that Iran is currently exporting. **Traders’ Strategies for Volatility** On the other hand, if you believe diplomacy will succeed, oil prices may lose their geopolitical risk premium. Traders with this perspective should look into buying put options on energy ETFs, which would gain from a price drop back to the low $80s. A peaceful agreement would not only maintain Iranian supply but also ease tensions in the Strait of Hormuz. Given the two possible outcomes, trading volatility itself is a smart strategy. A long straddle—buying both a call and a put option at the same strike price—can profit from significant oil price changes, whether due to sanctions or new agreements. We must keep in mind how sensitive the market is to supply disruptions in the Middle East. For example, the attacks on Saudi Arabia’s Abqaiq facility in September 2019 led to a nearly 20% surge in crude prices in one trading session, the largest jump since the 1990s. This history highlights how quickly prices can react, making options a useful tool for managing risk ahead of potential shocks. Currently, the CBOE Crude Oil Volatility Index (OVX) has risen from the low 30s to around 40 in the past month, indicating growing concern among traders. This suggests that the market is on edge and preparing for a major shift. Any solid news from the EU or Iran is likely to trigger this built-up tension. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now