The US dollar remains steady in European morning trade after its drop on Friday due to the US jobs report. Broader markets also appear calm as the possibility of a September rate cut by the Federal Reserve is weighed, shifting attention from economic fears to potential rate cuts.
The EUR/USD pair is down by 0.2% to 1.1560, influenced by large option expiries that are setting price boundaries for today. In contrast, USD/JPY is up by 0.4% to 147.97, and USD/CHF is currently up by 0.6% to 0.8085.
Commodity Currencies Show Little Change
Commodity currencies show little change against the dollar, with USD/CAD stable at 1.3781 and AUD/USD slightly down by 0.1% to 0.6471. Overall, the changes remain minimal as these near-term levels come into play at the start of the week, following the impact of the weak US jobs report.
The weak US jobs report from last Friday has reset our expectations for the coming weeks. With the economy adding only 95,000 jobs against forecasts of 180,000, the market is now betting heavily on a Federal Reserve rate cut. We see Fed funds futures now pricing in an over 80% probability of a 25-basis-point cut in September, a huge jump from under 40% before the data was released.
For currency traders, this points to a weaker dollar ahead, particularly against the euro. We should consider using options to position for a rise in EUR/USD, perhaps by purchasing call options with strike prices near 1.1650 or 1.1700 leading into the September Fed meeting. The large expiries around the current 1.1560 level are acting as a temporary magnet, but the fundamental pressure is now upwards.
Stock Market Reaction
The stock market is treating this weak economic news as a positive development, as lower interest rates are good for equities. We saw the CBOE Volatility Index (VIX), a key gauge of market fear, drop from its initial spike to settle around 14, showing that investors welcome the prospect of easier monetary policy. This calm environment is favorable for strategies like selling put options on major indices to collect premium.
Looking back at how markets reacted in 2019, the last time the Fed clearly signaled a shift from holding to cutting rates, the dollar began a multi-month downtrend. While we see USD/JPY up slightly at 147.97 today, this strength is unlikely to last if the Fed delivers the expected cut. Therefore, a strategic response would be to consider buying put options on USD/JPY, anticipating a decline as the US interest rate advantage shrinks.
