Today’s agenda is sparse, with limited releases during the European session. The Eurozone Retail Sales and Construction PMIs will be released, but they are not expected to impact the European Central Bank or market significantly.
The American session offers even less, featuring only the Canadian PMIs. The potential focus might be Fed’s Cook speaking about the “US and global economy” in a virtual event. A possible outcome of this speech could be indications towards a rate cut in September.
Market Responses To Fed Speeches
Previous mentions from Fed’s Williams and Fed’s Daly have suggested the possibility of a September cut. Market responses have been aligning with this expectation since the recent, less robust Non-Farm Payroll figures.
With the market already pricing in a September rate cut, the easy trade is behind us. Fed funds futures currently imply over a 90% probability of a 25-basis-point reduction next month. Therefore, we should not focus on the cut itself, but on the potential for a surprise in its size or timing.
This expectation was cemented after the July 2025 Non-Farm Payrolls report, which we saw come in at just 155,000 jobs against a forecast of 210,000. That report also showed the unemployment rate ticking up to 4.1%, giving dovish Fed members the data they need. Any deviation from this narrative at the September meeting will create significant market moves.
In the coming weeks, traders should consider buying volatility ahead of the September FOMC meeting. Looking back at the start of the 2019 easing cycle, we saw the VIX index jump from around 12 to over 19 in the weeks surrounding the first cut. Purchasing straddles or strangles on major indices like the S&P 500 could profit from a larger-than-expected move in either direction.
Strategies For Traders Amid Rate Cuts
We should also look at options on SOFR futures for a more direct play on interest rates. While the September cut is priced in, the market is less certain about the path for the rest of 2025 and early 2026. Buying call spreads on SOFR futures could be a cost-effective way to bet that the Fed will signal a more aggressive series of cuts than currently anticipated.
A dovish Fed pivot is typically bearish for the U.S. dollar. Historically, the Dollar Index (DXY) has weakened in the months following the start of a new cutting cycle. Traders can position for this by buying call options on currency pairs like the EUR/USD, which would benefit from a weaker dollar.
