The Federal Reserve announced a 25 basis points cut in interest rates, aligning with expectations. Projections for September show upgraded growth estimates and indicate two more cuts in 2025. During the decision, Fed Chair Powell noted moderating GDP growth and highlighted labour market risks. The Bank of Canada also reduced rates by 25 basis points. Economic forecasts from the Atlanta Fed remained steady with a 3.4% growth estimate, while US August housing starts fell short of expectations at 1.307 million.
Market reactions included a 0.1% drop in the S&P 500, a decrease of $0.50 in WTI crude oil pricing to $64.04, and an increase in US 10-year yields by 5.4 basis points to 4.08%. Gold prices saw a decline of $32 to $3,657. Among currencies, the USD strengthened while the EUR weakened. Initially, markets perceived the Fed’s announcement as dovish due to plans for additional rate cuts but reactions shifted during Powell’s press conference.
The USDJPY Pair
The USD/JPY pair experienced fluctuations, starting at 146.25, dropping to 145.50, then reaching a session high of 147.02. The market is currently pricing in 43.7 basis points in easing by year-end, with December’s meeting remaining unpredictable. Historically, a Fed rate-cutting phase tends to continue once initiated.
We should prepare for increased market choppiness in the weeks ahead. Powell’s “risk management” language combined with a split Fed vote suggests future policy is highly uncertain, which typically fuels volatility. Looking at options on the VIX index, which has historically shown sustained elevation after initial Fed cuts like the one in July 2019, could be a prudent hedge against sharp, unexpected market swings.
The dollar’s rally after a rate cut is a significant tell, showing that the US economy is viewed more favorably than its peers. The Bank of Canada cutting in lockstep and cautious commentary from the ECB reinforces this divergence in monetary policy. We should look at call options on the dollar, as the interest rate spread between US and German 2-year bonds has already widened to over 150 basis points this year, a trend we expect to continue.
We see the equity market struggling for clear direction, with the S&P 500 finishing flat after a volatile session. This suggests that while a major crash isn’t imminent, the fuel for a new rally is missing until the Fed provides more clarity. Strategies like selling iron condors on the SPX index could be effective, capitalizing on a sideways market over the next few weeks.
The Rise in 10 Year Yield
The rise in the 10-year yield to 4.08% is the most important signal, as the bond market is challenging the Fed’s dovish projections. With the latest August inflation data from 2025 showing stubbornness at 3.6%, traders are betting that a resilient economy will prevent the two additional cuts projected for this year. We could consider put options on bond ETFs like TLT, positioning for yields to remain firm or climb higher.
Gold’s sharp drop to $3657 shows its sensitivity to a strong dollar and rising real interest rates, which makes holding a non-yielding asset less attractive. We’ve seen historically that when the US Dollar Index (DXY) pushes past key levels and real yields are positive, gold faces significant headwinds. In the near term, buying protective puts on gold futures or related ETFs could be a sound strategy.
