Markets are split on whether the Federal Open Market Committee will raise rates at next week\u2019s September meeting, leaving unusually little consensus so close to the decision. Attention is concentrated on a single release: Friday\u2019s US CPI print for August. A higher-than-expected number could strengthen the case for a hike, although the Fed\u2019s reluctance to be led by incoming data means the report may still not settle expectations.<\/p>\n\n
With the inflation data pending, the dollar\u2019s near-term direction may be shaped more by overseas developments, particularly in Japan. A sharp yen rally is being watched because large USD\/JPY swings often filter into smaller moves in the dollar against other currencies. A 25 basis point rate rise by the Bank of Japan is now widely anticipated for next week\u2019s meeting, and more hawkish rhetoric could push USD\/JPY lower, especially if accompanied by further FX intervention in coming days.<\/p>\n\n
We are facing an unusually split market ahead of next week’s September FOMC meeting, with traders highly undecided on whether the Fed will raise rates. Derivative traders must brace for high volatility because this Friday’s August CPI release is expected to be the deciding factor. Fed fund futures currently show an almost even 50-50 split on the rate decision, which is incredibly rare this close to the meeting.<\/p>\n\n
We suggest that derivative traders look into straddle or strangle options strategies on the US dollar to benefit from the sharp moves expected after the inflation report. A hotter-than-expected CPI print\u2014surpassing the projected 2.5% annualized rate\u2014could quickly embolden the hawkish camp. Still, because the current Fed is notoriously averse to giving clear guidance, we advise against heavy directional bets before the actual meeting.<\/p>\n\n
We also need to look beyond the US and watch the sudden, aggressive rally in the Japanese Yen. The Bank of Japan seems locked in to raise rates by 25 basis points next week, which would push their benchmark rate even higher. If Japanese policymakers accompany this hike with hawkish comments or direct market intervention, it could easily send the USD\/JPY pair tumbling.<\/p>\n\n
We recommend using short-dated put options on USD\/JPY to protect against a sudden break below key psychological support levels like 140. Implied volatility for one-week yen options has already spiked, showing that the cost of protection is rising quickly. Keeping position sizes smaller than usual will help us manage the overlapping risks of these two major central bank meetings.<\/p>\n\n\n\n