The European morning session was mostly calm in anticipation of the US CPI report. The Reserve Bank of Australia cut interest rates by 25 basis points, with the next potential move eyed for September. Market expectations lean towards another rate cut by year-end.
The UK’s employment report aligned with predictions, showing divergent data between government and private reports. Wage growth slowed but did not affect interest rate predictions, with a rate cut anticipated for February 2026. Market activity remained rangebound, with slight gains for the dollar.
Market Awaits US CPI Report
Currency markets await the US CPI report, the month’s last key event before the Jackson Hole Symposium, where the Fed may discuss rate cuts. Fed sentiment leading into the September FOMC meeting appears to favour a cut, pending CPI results.
The main event everyone is watching is the US CPI report later today. We’re seeing the dollar get a bit stronger, which suggests traders are buying protection against a surprise high inflation number. This nervousness means options that guard against a sharp market move, like puts on bond futures or calls on the dollar, are likely becoming more expensive.
A hot inflation report could completely change the outlook for a September interest rate cut from the Fed. Currently, Fed Funds futures contracts show the market is pricing in a 65% chance of a cut next month, a significant shift over the past few weeks. A higher-than-expected CPI could see that probability collapse, creating a surge in short-term interest rate volatility.
Impact on Australian and UK Economies
With the Reserve Bank of Australia cutting its cash rate to 3.60% and signaling more to come, the path for the Australian dollar looks tilted to the downside. We saw how the AUD/USD pair struggled after the RBA meeting, and this Thursday’s employment report is the next major hurdle. Traders might consider buying AUD/USD put options to position for any signs of a weakening labor market.
In contrast, the UK is on a much slower easing path, with markets not fully pricing in a Bank of England rate cut until December 2025. This growing difference in policy between the RBA and the BoE suggests that strategies betting on sterling strength against the Aussie dollar could gain traction. Meanwhile, the weak German ZEW survey reinforces the pessimistic outlook for the Eurozone, adding to the dollar’s relative appeal.
Looking past today, the Jackson Hole symposium at the end of August is the next major risk event. We only need to look back to the sharp market sell-off after Chairman Powell’s hawkish speech in August 2022 to be reminded of how this event can reset market expectations. Holding some volatility protection through the end of the month, perhaps via VIX options, seems like a prudent strategy.
