The USD showed varied strength as trading commenced, rising against the EUR by 0.09% and the JPY by 0.22%, but fell 0.14% against the GBP. Following a 25 basis point rate cut by the RBA, the AUDUSD dropped by 0.45%. The US Consumer Price Index (CPI) is anticipated to increase, with expectations set at a 0.2% rise for headline CPI and a 0.3% rise for core CPI. Year-on-year, headline inflation is projected at 2.8%, while core inflation is estimated at 3.0%.
The RBA unanimously cut rates to 3.60%, citing inflation moderation and uncertain economic outlook. It predicts core inflation at 2.5% by 2027 and GDP growth slowing to approximately 2.0%. Bank of America reported a 1.8% year-over-year increase in household credit and debit card spending, with a rise of 0.6% month-over-month. However, lower-income households saw a 1.3% increase in wages, contrasted with a 3.2% rise for higher-income groups.
Us Small Business Optimism Index
The US small business optimism index increased to 100.3, with business condition views improving. Yet, 21% of businesses cited labour quality as a primary concern. Ahead of the CPI release, US stocks showed slight gains, with the Dow up 32 points, S&P 4.5 points, and NASDAQ 25 points. US yields also rose, with the two-year yield at 3.772% and the 10-year at 4.290%.
With the US CPI data due today, August 12, 2025, we are preparing for a potential spike in market volatility. Current Fed funds futures show the market is pricing in a 40% chance of a rate hike in September, and a hotter-than-expected core inflation number would likely send those odds soaring. Traders should consider that options premiums on major currency pairs and indices will likely increase heading into the release.
The general market mood is already tense, which we can see in the CBOE Volatility Index, or VIX, now hovering near 18. This is noticeably higher than the calmer levels we saw earlier in the summer, reflecting uncertainty around both the CPI and the upcoming Trump-Putin meeting on August 15. Given the conflicting signals coming out of Ukraine, buying protective puts on the S&P 500 could be a sensible way to hedge against geopolitical shocks in the coming days.
Opportunities and Risk Management
We see a clear opportunity in the EURUSD pair, given the dismal German ZEW survey results. This data points to a struggling European economy at a time when the US appears more resilient, creating a strong divergence. Selling out-of-the-money EURUSD call options seems like a viable strategy to capitalize on potential euro weakness.
The Reserve Bank of Australia’s decision to cut its interest rate to 3.60% provides a very direct signal for the Australian dollar. This move, aimed at stimulating a slowing economy, comes as prices for iron ore, a key Australian export, have declined nearly 15% since the spring of 2025. This confirms our bearish outlook on the AUDUSD, making short positions or buying puts attractive.
For USDJPY, the story remains about the significant gap between US and Japanese government bond yields. With the US 10-year yield holding firm above 4.25% while Japanese yields are pinned near zero, the fundamental case for a stronger dollar against the yen is intact. We can use this to structure bullish option plays on the pair, though we must stay alert for any sudden global risk aversion that traditionally strengthens the yen.
However, we are cautious about getting too bullish on the US outlook due to the stress appearing among lower-income households. The BofA report showing their wage growth slowing to just 1.3% is a red flag for future consumer spending, which drives the economy. This underlying weakness suggests that any long positions in US-focused assets should be carefully managed.
