Today, no major economic data is expected from Europe, leaving traders to process last week’s softer US jobs report. The US NFIB small business optimism index for August is the only notable data released today, but it has minimal impact. European market focus is primarily on precious metals.

Gold and Silver Surge

Gold is experiencing a surge, reaching new record highs, with an increase of 0.4% to $3,648 today. Silver is also benefiting, surpassing $41, a peak not seen since 2011. In France, the political landscape sees changes, with François Bayrou removed as prime minister following a confidence vote; however, the market reaction remains steady.

Japan also experiences political shifts as Shigeru Ishiba resigns after poor election results. This initially impacted market sentiments, causing USD/JPY to fluctuate but stabilising at 147.30. The US dollar finds itself vulnerable after recent employment data, prompting speculation about a potential Federal Reserve interest rate cut.

Attention now turns to Thursday’s US CPI report, which could influence the market’s rate cut expectations. A softer inflation report might support aggressive rate cut calls, whereas stronger tariff-related inflation data could complicate the Federal Reserve’s communication strategy. Traders will be vigilant for any indirect signals from policymakers.

Given the quiet data calendar today, we are positioning for the US inflation report on Thursday. Last week’s soft jobs report has set a dovish tone, weakening the dollar and fueling bets on aggressive Federal Reserve rate cuts. This expectation is the primary driver of market sentiment right now.

Fed Action Expectations Intensify

The momentum in precious metals is hard to ignore, with gold pushing fresh record highs near $3,650. We’ve seen open interest in December gold futures climb by over 5% in the last week, confirming new money is backing this rally. Buying call options on gold or silver ETFs remains a straightforward way to ride this powerful trend.

Expectations for Fed action are intensifying, with the dollar on its back foot. The CME’s FedWatch Tool now indicates an 85% probability of a rate cut this month, with odds of a 50 basis point cut rising to nearly 40%. This makes bearish dollar positions attractive, such as buying puts on a dollar index ETF or calls on the EUR/USD pair.

All eyes are on Thursday’s US CPI report, which will be the deciding factor for a potential 50 basis point cut. A lower-than-expected inflation number will pour fuel on the fire, while a high reading could cause market chaos as the Fed is in its pre-meeting blackout period. To trade this uncertainty, options strategies like a straddle on the S&P 500 index could pay off if we see a large market move in either direction.

In Europe, while the French political situation is currently calm, we should remain cautious. We remember the spike in French bond yield volatility during the 2017 election period, and surprise developments are always possible. With implied volatility low, buying cheap, longer-dated puts on the euro can serve as a prudent hedge against unforeseen political risks.

The yen is also showing signs of life after the Japanese prime minister resigned and the dollar weakened. The drop in USD/JPY below 147.50 suggests the lucrative yen carry trade is becoming less appealing as US interest rates are expected to fall. This could be the start of a larger move, making puts on the USD/JPY pair an interesting speculative play.

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