Today’s focus is on policy decisions from the Bank of Canada (BoC) and the Federal Open Market Committee (FOMC). Earlier, the UK Consumer Price Index report met expectations and did not impact market pricing, while the final Eurozone CPI is unlikely to affect the market unless there are major revisions.

In the American session, the BoC is expected to lower interest rates by 25 basis points, bringing the policy rate to 2.50%. This follows a Canadian jobs report showing job losses and an unemployment rate rise to 7.1% from 6.9%. Additionally, markets anticipate another 25 basis point reduction in December.

The Federal Reserve’s Decision

The Federal Reserve is set to decrease the Federal Funds Rate by 25 basis points to between 4.00% and 4.25%. Some governors may vote for a larger cut of 50 basis points. The release of the Summary of Economic Projections will be key, especially the dot plot, as it previously suggested 75 basis points of easing by 2026. However, market forecasts predict 148 basis points of easing with multiple cuts in 2025 and 2026, potentially leading to a hawkish reaction if fewer cuts are indicated.

Attention will subsequently shift to Fed Chair Powell’s press conference. He is expected to focus on labour market weakness over inflation, possibly hinting at stronger support for rate cuts should the labour market further decline.

With the Bank of Canada widely expected to cut rates today, we see the initial move in USD/CAD as already priced in. The real opportunity will come from the BoC’s forward guidance, especially with recent data showing Canadian retail sales have also softened alongside the weak 7.1% unemployment figure. We are therefore watching for options strategies that profit from a further weakening Canadian dollar if the bank signals an accelerated cutting cycle into 2026.

Market Expectations and Volatility

The main event is the Federal Reserve’s decision, where the expected 25 basis point cut is less important than the new dot plot. There is a significant gap between the market, which expects deep cuts, and the Fed’s last projection from June 2025. Looking back at the Fed’s pivot in 2019, we saw how quickly markets can reprice when official projections finally catch up to reality, suggesting high volatility ahead.

Recent US economic data supports the case for cuts, making a hawkish surprise more impactful. We’ve seen nonfarm payrolls average just 90,000 for the last quarter, a sharp deceleration from the 180,000 average seen earlier in the year. With core PCE inflation now down to 2.8%, the Fed has the justification it needs to focus on the weakening labor market.

Given the risk of a “hawkish” dot plot that shows fewer cuts in 2026 than the market hopes for, we are considering buying put options on major stock indices like the S&P 500 as a hedge. Conversely, if the dot plot aligns with the market’s dovish view, positions in SOFR futures should perform well as they rally on lower rate expectations. The divergence in possibilities makes this an ideal environment for volatility trades, such as straddles on the SPY ETF.

Finally, we will be analyzing Fed Chair Powell’s press conference for his tone on the labor market. Any language that emphasizes a commitment to supporting employment, even at the risk of slightly sticky inflation, will be our signal to add to dovish bets for 2026. This could involve using longer-dated interest rate swaps to lock in expectations of a lower policy rate deep into next year.

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