The European FX session was quiet with little news and minor economic releases. The EU confirmed a 15% tariff that includes cars and parts, with potential ‘turbulence’ in future talks noted by the EU trade chief.
Traders are focused on the US ISM Services PMI expected at 10 am ET, paying attention to the prices component. Fed’s Daly’s previous comments had a positive effect on the stock market, driven by rate cuts unless substantial economic changes occur.
Discussion On Tariffs And Trade
Upcoming is a segment featuring Trump on CNBC’s “Squawk Box,” likely discussing revenue from tariffs and expressing critiques on Fed Chair Powell.
We see the market has already digested the EU’s 15% tariff on cars, a situation that unfolded over the spring months of this year. For derivative traders, this means the big moves tied to trade headlines are likely behind us. The focus should now shift towards economic numbers and central bank actions for the rest of 2025.
All eyes are on the upcoming US ISM Services PMI data, with expectations centering around a 53.5 reading. A significant deviation from this, especially in the prices paid component, could trigger a jump in market volatility. We can look back at the market’s sharp reaction to the surprise inflation data in the first quarter of 2025 as a guide for what might happen.
The Federal Reserve’s recent dovish signals have created a floor under stocks, with markets now pricing in a 70% probability of a rate cut in September according to Fed funds futures. This creates a clear opportunity for options traders to position for swings around key data releases that could alter those odds. A strategy like buying straddles on major indices before the ISM report could be a way to play an unexpected outcome.
Market Volatility And Trading Strategies
We are currently seeing the VIX trading near a relatively calm 14, suggesting some complacency ahead of the data. However, implied volatility for short-dated options is rising, indicating that traders anticipate a short-term burst of activity. This pattern is similar to what we observed before the major central bank meetings earlier this year.
