US CPI for July, due Wednesday from the BLS, is expected to cool slightly, with headline CPI seen rising 0.1% month on month after June’s 0.4% fall, while the annual rate is forecast at 3.4% versus 3.5%. Core CPI, excluding food and energy, is pencilled in at 0.2% m/m and 2.5% year on year. Earlier disinflation was helped by energy: crude fell nearly 16% in May and then about 20% in June, returning to pre-war levels after a 17 June ceasefire. In July, however, WTI climbed nearly 22% as tensions resurfaced around the Strait of Hormuz, before easing in early August on talks involving Iran and Oman.
Rate pricing has shifted as markets absorbed softer US jobs data, including an unexpected 23K decline in NFP, leaving FedWatch implying about a 52% chance of a 25 bps Fed hike at the next meeting. A July core CPI print of 0.3% m/m or higher could reprice September expectations, while a downside miss below 0.2% could weaken the USD and lift EUR/USD; technical levels cited include resistance near 1.1570, 1.1630 and 1.1800, with support around 1.1470 and 1.1350-1.1330, alongside thresholds at 1.1580, 1.1515 and 1.1495.
Market Volatility and Risk Management Amid CPI Release
We believe derivative traders should prepare for heightened volatility today as the July US CPI report is released. The market expects a modest 0.1% monthly increase in headline inflation, but geopolitical tensions in the Middle East could quickly disrupt these estimates. Historically, CPI release days spark average intraday moves of over 80 pips on the EUR/USD, making tight risk management essential for anyone holding short-term options.
We must closely monitor crude oil prices, which have rebounded recently due to ongoing disputes over the Strait of Hormuz. Although West Texas Intermediate (WTI) crude briefly dipped earlier this month on hopes of a deal between Iran and Oman, renewed threats of supply disruptions are keeping energy markets highly sensitive. This volatile energy backdrop means even a soft inflation print today could be easily overshadowed if oil prices spike again in the coming weeks.
FX Options, Technical Levels, and Rate Expectations
For foreign exchange options, we recommend utilizing straddles or strangles to capitalize on the expected breakout in the EUR/USD currency pair. The key technical level to watch on the upside is the 100-day Simple Moving Average near 1.1570, while key support rests around 1.1470. A decisive daily close above 1.1580 would signal a strong shift in upward momentum, suggesting that traders should pivot toward bullish call options targeting the 1.1630 level.
With the CME FedWatch Tool showing a near-even split on a September interest rate hike, short-term interest rate futures offer another high-reward avenue. If core CPI prints at 0.3% or higher today, we expect rate hike bets to surge, boosting the US Dollar and making bearish put options on the Euro highly attractive. Conversely, a soft core reading below 0.2% will likely solidify a Fed pause, allowing traders to ride a short-term rally in risk assets.
