The USD initially dropped after the U.S. Producer Price Index (PPI) data showed weaker inflation but then rebounded as selling momentum eased. While inflation remains above the 2% target, it has dipped below 3%, providing the Federal Reserve with more reason to consider rate cuts.
Treasury yields decreased, particularly at the shorter end. The 2-year yield is at 3.533%, down 0.9 basis points, while the 10-year yield is down 0.4 basis points to 4.0703%. Last week, the 2-year yield was at 3.466%. With the Fed funds target at 4.50%, market expectations of easing are reflected in these figures.
Mortgage Rate Trends
Mortgage data showed positive trends for borrowers, with the average 30-year fixed rate falling to 6.49% from 6.64%, leading to a 9.2% increase in applications. U.S. stock indices also rose: the Dow gained 8 points, NASDAQ increased by 115 points, and the S&P added 31 points.
In currency pairs, EURUSD briefly rose above the 100-hour moving average before retreating, focusing now on the 200-hour moving average at 1.16918. USDJPY hit a low of 147.08 before rebounding, yet remains in a choppy trading range established since early August.
The softer Producer Price Index data reinforces the disinflationary trend we have seen building for months. This view is now more credible following last week’s August 2025 CPI report, which showed headline inflation at 2.8%, marking the second consecutive month below 3%. Consequently, derivatives markets are now pricing in an over 70% probability of a 25-basis-point rate cut at the Federal Reserve’s November meeting.
Options Strategy
With the 2-year Treasury yield well below the current Fed funds rate, options strategies that benefit from further declines in short-term rates look attractive. We could consider buying call options on short-term bond ETFs, a strategy that paid off during the market pivot we witnessed back in late 2023. The key is to position for the Fed’s easing cycle before it is fully priced in by the broader market.
The rally in tech stocks, especially semiconductors, signals a renewed appetite for growth assets as borrowing costs are expected to fall. Given the Nasdaq’s recent break above its 50-day moving average, traders should look at buying call options on the QQQ ETF or on leading chip stocks to capitalize on this momentum. This move is supported by solid fundamentals, as evidenced by Oracle’s strong earnings report just yesterday.
Despite the dovish Fed outlook, the US dollar’s rebound suggests caution is warranted in shorting the currency. The EURUSD pair’s failure to hold gains above its 100-hour moving average indicates underlying dollar strength, possibly because the European Central Bank is expected to be even more aggressive with its own easing. Selling out-of-the-money call spreads on EURUSD could be a way to profit if the pair remains capped below the 1.1742 resistance level.
The USDJPY pair is trapped in a range, and directional conviction is low. While the price is below key moving averages, suggesting a bearish bias, sellers have failed to break the 147.00 support level decisively. This reminds us of the choppy conditions in 2024 before the Bank of Japan made its significant policy shift, so traders might use strangles or straddles to position for a volatility breakout in the coming weeks.
