Lael Brainard, a former Federal Reserve Governor, said Trump’s policies might lead to increased risks of higher inflation and long-term interest rates. She noted the Federal Reserve’s independence is important for both markets and the economy.
The Federal Reserve is expected to reduce rates by 25 basis points at its upcoming September meeting. Trump’s proposal for a 15-20% minimum tariff on all EU goods correlates with the euro’s drop against the US dollar.
Us Durable Goods Data
US durable goods figures for July showed a -2.8% change, which was better than the anticipated -4.0%. Commerce Secretary Lutnick asserted that the Trump administration is not inclined to offer financial handouts.
The beginning of the new trading day saw USD weakening amid ongoing market volatility. European markets remain rangebound due to a lack of new drivers, according to InvestingLive.
We are seeing a major disconnect between market expectations and potential political reality. The futures market is currently pricing in over an 80% chance of a 25-basis-point rate cut in September. However, the latest Core PCE print for July 2025 came in at 2.9%, making an immediate cut less certain if inflationary rhetoric continues.
The proposed 15-20% minimum tariff on EU goods introduces a direct and tradable risk to the euro. We have already seen the EURUSD spot rate fall below 1.07 this week on the back of this news. Derivative traders might consider buying puts on EURUSD or selling call spreads to position for further downside if these trade war fears escalate.
Policy Uncertainty and Market Volatility
This environment of policy uncertainty suggests that broad market volatility could rise in the coming weeks. We remember how the VIX index, which now sits near 14, spiked above 20 during the trade disputes back in 2019. Buying call options on the VIX or VIX futures could be a prudent hedge against a surprise Fed decision or a sharp political escalation.
The conflicting signals make options on SOFR futures particularly interesting ahead of the September meeting. Given the 2s10s yield curve has flattened by another 10 basis points this month to just 15 basis points, uncertainty is growing. A long straddle, which involves buying both a call and a put, could profit whether the Fed holds rates steady due to inflation fears or cuts more aggressively than the expected 25 basis points.
