Today features a few ECB speakers, with the European session spotlighting ECB’s Schnabel. Known for her neutral to hawkish stance, Schnabel has mentioned that current rates are mildly accommodative and inflation risks might increase. She also stated that rate hikes could occur sooner than anticipated.
In the American session, data releases include Canadian manufacturing sales and the NY Empire Manufacturing PMI. These are considered low-tier and volatile, unlikely to impact market pricing significantly. ECB’s President Lagarde will speak in the evening, but it’s expected she won’t provide new insights, having addressed key points at last week’s monetary policy press conference.
Spotlight on Timiraos
Additionally, keep an eye on Timiraos from the WSJ, who might publish an article on the Federal Reserve before Wednesday’s decision. If the article discusses the FOMC considering a 50 basis points cut, it may elevate expectations for a more substantial policy move.
We see today as a quiet session, with the market’s full attention on the Federal Reserve’s decision this Wednesday. The CBOE Volatility Index (VIX) has already crept up to around 19, reflecting the growing uncertainty ahead of the meeting. This suggests traders are buying protection, and options premiums are getting more expensive.
We are keenly watching for any hints of a 50 basis point rate cut, a move that would be more aggressive than many expect. This possibility is gaining traction after the August 2025 jobs report showed hiring slowing to 150,000 and the latest CPI inflation figure cooled to 2.8%. Based on CME FedWatch Tool data, the market is currently pricing in a nearly 30% chance of this larger cut.
Fed and ECB Divergence
While we anticipate a potentially dovish Fed, the European Central Bank remains on a different path. ECB speakers like Schnabel continue to signal that rate hikes could come sooner than expected, creating a clear policy divergence. This fundamental split could provide a tailwind for the EUR/USD pair in the weeks ahead.
We have seen this setup before, like during the policy pivots of 2019 when the Fed began easing while other central banks held firm. Buying short-dated call options on equity indices could be a way to position for a dovish surprise from the Fed. However, the rising implied volatility means these positions should be sized carefully.
