The European morning saw a quiet session with limited data releases. The focus was on the UK’s employment report and Germany’s ZEW survey, with the latter missing expectations but offering a positive future outlook.
ECB And US Treasury’s Stance
ECB officials maintained their stance on not adjusting rates without compelling reasons. The US Treasury Secretary made positive remarks on US-China relations and tariff issues.
The US dollar weakened further, particularly against the Euro and Swiss Franc, following in-line CPI data and skewed jobless claims. The recent claims were impacted by fraudulent filings in Texas and could see downward revisions.
The Core PCE for August is anticipated to rise by 0.2%, maintaining the yearly rate at 2.9%. This, along with weak job reports, has reinforced dovish expectations for the Fed, unlikely to exceed market predictions.
This dovish sentiment bolstered risk assets, with US indices hitting new peaks and gold continuing its upward trajectory. The American session will feature the Canadian CPI and US Retail Sales data.
Market Impact And Forecast
The sustained weakness in the US dollar is the primary signal for the coming weeks, as we head into tomorrow’s FOMC meeting. The market has heavily priced in a dovish stance from the Fed, pushing the Dollar Index (DXY) below 101.50, a drop of over 2.5% this month. This suggests that continuing to build positions against the dollar, particularly through options on currencies like the euro and Swiss franc, remains a viable strategy.
Given that dovishness is already the consensus, the main risk is a surprise from the Fed that is not as dovish as the market expects. We remember the sharp dollar rally after the Fed was less accommodative than anticipated back in the spring of 2024, which caught many traders off guard. Therefore, using options to buy volatility on major pairs like EUR/USD ahead of the announcement could be a prudent way to trade a potential overreaction.
Risk assets are clearly benefiting from this environment, with the S&P 500 pushing past the 5,800 level for the first time. The low volatility, with the VIX now trading below 13, makes protective puts relatively inexpensive. Holding long positions in equities via call options while hedging with some downside protection seems sensible to guard against any hawkish surprise.
Gold’s rally to a new all-time high, breaking the $2,600 per ounce level, is a direct consequence of the weak dollar and expectations of lower real interest rates. This momentum will likely continue as long as the narrative of a dovish Fed remains intact. Traders could look at call spreads on gold futures to participate in further upside while defining their risk at these historically high prices.
In contrast, the European Central Bank is signaling it is on a hard pause, which should limit surprises and keep euro-related volatility relatively contained. This creates a clear divergence in policy expectations between the US and Europe. This perceived stability makes the euro an attractive currency to own against the dollar until the Fed provides fresh guidance.
