The FOMC rate decision and Chair Powell’s press conference will be key events next week. Three other central banks will announce policy decisions: The Bank of Canada is anticipated to cut rates by 25 bps, while the Bank of England and the Bank of Japan are predicted to maintain current rates. Markets will look for hints on future policy paths.
Key Economic Events
On Monday, China’s activity data will be watched, with retail sales estimated at 3.8%, industrial production at 5.7%, and fixed asset investment under scrutiny. Tuesday will see the UK’s jobs report, with unemployment expected to stay at 4.7% and a focus on wage growth, alongside the release of Canadian CPI figures and US retail sales data.
Wednesday follows with the FOMC meeting, where a 25bp rate cut is expected, and updated economic projections will be shared. The Bank of Canada meeting is also set for Wednesday, anticipating a 25bp rate cut. New Zealand GDP for Q2 is estimated to show negative growth at -0.3%.
Thursday focuses on the Bank of England meeting, expected to maintain the Bank Rate at 4.0%. Attention is on potential larger cuts or a slower pace of QT. Friday will feature the Bank of Japan meeting, expected to keep rates at 0.5%, and UK retail sales for August. Quad witching may increase market volatility.
With the Federal Reserve expected to cut rates by 25 basis points next Wednesday, the move itself is likely already priced into the market. This is supported by the August jobs report we saw last week, which showed a slight cooling with nonfarm payrolls coming in just below estimates at 160,000. The primary focus for us will be the updated economic projections and Chair Powell’s tone regarding the path forward.
Market Volatility and Strategies
Given the uncertainty around the Fed’s future plans, we’ve seen the VIX index climb to around 18 from the low teens it held over the summer. This suggests traders should prepare for a spike in volatility around Wednesday’s announcement. Strategies like options straddles on the S&P 500 could be effective for playing a significant market move, regardless of the direction.
This moment is reminiscent of the “mid-cycle adjustment” we saw from the Fed back in 2019, when a series of cuts were initiated to support a slowing economy. That period led to short-term market choppiness before equities eventually resumed their climb. We will be watching closely to see if Powell signals this is a one-off adjustment or the start of a broader easing cycle.
The policy differences between central banks also present clear opportunities in the currency markets. With the Bank of Canada expected to cut rates and the Bank of England holding firm, the fundamental backdrop favors long positions in the British pound against the Canadian dollar. This is reinforced by recent UK data showing wage growth remains sticky at over 5.5%, forcing the BoE to stay restrictive for now.
The Bank of Japan remains the major wildcard, as any hint of a future rate hike could cause the yen to strengthen dramatically. This creates a compelling risk-reward setup for buying cheap, out-of-the-money put options on the USD/JPY pair. Such a position would offer significant upside if the BoJ delivers a hawkish surprise.
Finally, the week concludes with quad witching, which is the simultaneous expiration of four types of derivative contracts. We must be prepared for unusually high trading volume and potential price dislocations, especially near Friday’s market close. Historically, we have seen volumes on these days increase by over 30%, which can amplify the market’s reaction to the week’s central bank news.
