The United States Michigan Consumer Expectations Index recorded a value of 50.3 in October, missing earlier projections of 51.2. This data point reflects the consumer sentiment within Michigan.

The Dow Jones Industrial Average reached a new height, driven by milder inflation figures. Meanwhile, gold prices rebounded as recent softer US CPI data increased expectations for potential interest rate cuts.

Currency Movement and Expectations

The EUR/GBP pair rose to a four-week high, which was influenced by expectations of dovish Bank of England actions, despite strong UK data. Concurrently, the AUD/USD held steady amidst mixed US economic data, which has caused traders to proceed with caution.

Gold surpassed the $4,100 mark per troy ounce, as stakeholders monitored developments in US-China trade relations and news of the US government shutdown. Additionally, Bitcoin and altcoins like Ethereum showed a slight uptick, buoyed by stable retail demand.

JPMorgan is planning to launch Bitcoin and Ethereum-backed loans for its institutional clients by the end of the year. This move indicates a shift in its policy and approach towards digital currencies.

All information provided by FXStreet concludes that while market data can guide decisions, risks remain, and investment choices should be made judiciously.

Federal Reserve and Inflation Outlook

The miss on the Michigan Consumer Expectations Index, now at 50.3, is a significant signal of weakening household confidence. This is the third consecutive monthly decline, a pattern we haven’t seen since the brief slowdown in early 2024. This trend strengthens the case that the Federal Reserve’s next move will be a rate cut to support the economy.

With softer inflation data reinforcing this view, we see markets now pricing in an 85% probability of a 25-basis-point rate cut at the November FOMC meeting. The most recent September CPI report showed core inflation easing to 2.8%, giving the Fed ample room to pivot. This makes trading derivatives tied to short-term interest rates, like Fed Funds futures, particularly active.

Despite the Dow reaching new highs, the underlying weakness in consumer sentiment creates a risky divergence. We believe the CBOE Volatility Index (VIX) is too low, currently trading near 14, suggesting market complacency. Derivative traders should consider buying VIX call options or S&P 500 put options as a hedge against a potential equity pullback.

Gold’s push above $4,100 is a direct response to falling rate expectations, which lowers the opportunity cost of holding the non-yielding metal. We have observed a sharp increase in open interest for December gold call options, signaling a strong bullish sentiment. A weaker dollar, which we expect to follow any Fed rate cut, would provide an additional tailwind for precious metals.

The US Dollar is likely to face downward pressure as rate cut bets solidify, a scenario we saw play out during the Fed’s policy pivot back in late 2023. This creates opportunities in currency markets, particularly for pairs like EUR/USD, which is holding firm above 1.1600. Using options to establish long positions in EUR/USD could be a capital-efficient way to trade this outlook.

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