The dollar firmed in FX after August US PPI accelerated beyond expectations, with focus now on August US CPI due later today. A stronger print could lift the USD further, pressure gold and weigh on US equities, while raising the likelihood of tighter Fed policy at next Wednesday’s meeting. Gold edged lower as the currency strengthened, and US bond yields climbed to levels last seen almost 20 years ago, boosting the appeal of fixed income as a safe-haven alternative.
Oil slipped in the Asian session but stayed near $100 a barrel for the week, as Middle East tensions persisted and the Houthis took control of Yemen’s port of Mocha, extending Iran’s reach from the Strait of Hormuz to the Bab al-Mandab Strait on the Red Sea. US equity indices closed lower, with higher oil and yields acting as headwinds ahead of today’s CPI and next week’s Fed decision. Other events include UK July GDP and manufacturing output, the US preliminary UoM consumer sentiment for September, and speeches from the ECB’s Lane, Kocher and Lagarde. Technical levels flagged include USD/JPY below 155.00 (R1) with RSI near 30, and WTI pivoting around 93.30 (S1) and 98.50 (R1), with targets at 152.10/149.40 and 157.50 for USD/JPY, and 103.65 or 88.60 for WTI.
Derivative Trade Strategy Recommendations
We recommend that derivative traders prepare for sharp market movements today as the US August CPI release will heavily influence the Federal Reserve’s rate decision next Wednesday. If inflation climbs above the forecasted 3.2% year-on-year, we expect the US dollar to surge. For FX traders, this makes buying USD/JPY call options attractive if it breaks above 155.00, though a downside miss could quickly pull the pair down to 152.10.
We suggest taking long positions or buying call options on WTI crude to capitalize on intensifying Middle East tensions. The Houthis taking control of Yemen’s port of Mocha threatens crucial shipping lanes in the Red Sea, driving supply fears. This disruption has already helped push WTI prices up by nearly 10% recently, and we believe it could easily test the $103.65 resistance level in the coming weeks.
Outlook for Gold and Equity Markets
For gold, we favor bearish derivative strategies like buying put options. High US bond yields, which have recently hovered near 4.5%, continue to make the bond market a much more attractive safe haven than non-yielding gold. As long as the US dollar remains strong, we expect gold prices to remain under heavy pressure and slide lower.
In the equity markets, we advise buying index put options to hedge against a broader market sell-off. Rising oil prices and high bond yields are already hurting US stock indexes, which historically suffer during September with the S&P 500 averaging a 1.5% drop. If today’s inflation print is higher than expected, we anticipate further losses for equities as the Fed comes under pressure to keep interest rates higher for longer.
