European markets showed a cautious start, with Eurostoxx futures down by 0.1% during early trading. US futures also displayed minimal movement, with S&P 500 futures rising by only 0.1%. The European Central Bank policy decision is not expected to impact the market significantly today.
Us CPI Report
All eyes are on the US Consumer Price Index report, which is considered a key element for today’s trading. In other news, a report noted that China might provide aid to local governments to address outstanding debts. Meanwhile, the USDJPY remains within its current range as market participants anticipate the US CPI data release.
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With markets tentative ahead of the US inflation report, we should prepare for a spike in volatility. US futures are flat, showing a market coiled for a significant move after the data is released at 8:30 AM ET. Looking back at the sharp market swings following CPI reports in 2023 and 2024, a similar reaction today is highly probable.
The CBOE Volatility Index (VIX) is hovering near a relatively low 16, which makes buying options attractive right now. This suggests we can use strategies like straddles on the S&P 500 to profit from a large move, whether up or down. A position established before the report will benefit from the almost certain rise in implied volatility immediately after the numbers are public.
Tariffs and European Concerns
The looming threat of 15-20% tariffs on European goods introduces a specific bearish risk for the Eurozone. We should consider buying put options on the Euro Stoxx 50 or establishing short positions on the EUR/USD pair for the coming weeks. This geopolitical tension will likely weigh on European assets regardless of today’s US data.
Consensus for this morning’s August inflation data is for the annual rate to remain sticky at 3.4%, a level the Federal Reserve is not comfortable with. A hotter-than-expected print would likely cause a sharp rise in Treasury yields and a sell-off in equities, particularly in rate-sensitive tech stocks. Conversely, a number below 3.2% could spark a significant relief rally.
While the ECB policy decision is also today, it is expected to be a non-event, with markets having fully priced in that rates will be held steady. This policy stillness in Europe, contrasted with the data-driven uncertainty in the US, keeps the focus entirely on the dollar. A strong CPI reading could finally push USD/JPY out of its long-held range and toward new highs for the year.
