Insights 
VT 
The US Dollar is showing modest gains against most G10 currencies during Friday’s North American session. This rise is partly due to month-end flows amidst a fragile market tone, influenced by a CME outage.
The CME data centre malfunction has halted trading, affecting market liquidity during a holiday-thinned period. Trading volumes are around 60-70% of normal levels. Many G10 currencies are weakening slightly within their recent ranges, with the EUR and NZD underperforming, down around 0.4% against the USD. The CAD is relatively stable, down just 0.1%, while the JPY remains flat.
Global Market Movements
Global equity indices show little movement, while government bonds hint at mild risk aversion through slightly lower yields in Europe. The CME outage has stopped trading in commodities and Treasury futures. Market attention is on potential Fed actions, with a December cut priced at 20 basis points. Upcoming US releases include ISM manufacturing on Monday and ADP employment on Wednesday.
The main focus next week will be on the PCE inflation figures and University of Michigan’s sentiment data. No Fed officials are scheduled to speak, due to the communications blackout before the December 10 decision. Recent Fed communications have leaned dovish, though the risk of dissent remains.
The current strength in the US dollar seems driven by temporary month-end flows and thin markets. The CME outage has rattled liquidity, causing a noticeable spike in the CBOE Volatility Index (VIX) to over 19 from its recent average around 17. We see this as a short-term disruption, with the real focus for the coming weeks lying elsewhere.
All eyes are now on next week’s Personal Consumption Expenditures (PCE) inflation data, the last major report before the Fed’s December 10th meeting. After October’s Core PCE figure came in at a still-stubborn 2.8%, this upcoming release will be critical in confirming the disinflationary trend. A number significantly above or below that could sharply reprice market expectations.
Fed Rate Cut Speculation
The Fed funds futures market is currently pricing in about a 20 basis point cut, which suggests an 80% probability of a standard quarter-point reduction. This high-but-not-certain expectation creates an interesting setup for options traders, particularly in interest rate derivatives. Any surprise from the PCE data could cause the implied odds of a cut to swing dramatically toward 0% or 100%.
We are concerned about the risk of dissent within the FOMC, even if a dovish decision is delivered. The situation is reminiscent of 2019 when the Fed cut rates as a form of “insurance” but faced multiple dissenting votes at each meeting. This internal disagreement could lead to a hawkish surprise in the policy statement, even if they do cut rates.
Given the uncertainty, we are looking at strategies that could benefit from a significant move after the PCE and FOMC announcements. This includes considering options on Treasury futures, which are directly sensitive to rate expectations. Volatility plays, such as straddles on major currency pairs like EUR/USD, may also be appropriate to capture a sharp move in either direction.
