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As the next FOMC approaches, markets are pricing in a high probability of a rate cut by the Federal Reserve (Fed) at its upcoming meeting, along with several more over the next year.

Potential rate cuts make dollar-linked pairs especially interesting. The USD/CNH is now testing a three-year support level. History shows that a decisive break below this area often triggers a significant downward move.

Dollar weakness has driven EUR/USD toward the upper boundary of a multi-year descending channel—a level that could prove pivotal.

The EUR/JPY’s multiyear uptrend is now being tested as it trades near the 174 level where it was previously rejected.

The 2-Year, 5-Year and 10-Year T-note futures butterfly spread has generally followed the direction of the Fed fund rates. As the window for the next round of cuts opens, this spread will be interesting to watch.

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September has arrived with a sobering dose of economic reality for the U.S., casting a more cautious tone over markets and policy outlooks alike. Job openings in July fell to 7.18 million, the lowest since last September. This signal softening demand in key sectors such as healthcare, retail and leisure. The pullback, combined with persistent tariff pressures and rising costs, has raised concerns over consumer spending resilience and overall economic momentum ahead of the Fed’s September meeting.

The latest Beige Book from the Fed paints a mixed picture. While economic activity and employment are largely stable, tariffs loom large as a weight on both household budgets and corporate sentiment, pushing many businesses to halt hiring despite moderate price increases. Pressure from tariff-inflated costs, combined with a decline in consumer confidence, signals a tightening economic environment. The drop in confidence was evident in the University of Michigan's sentiment index, which fell to 58.2 in August. It is a backdrop that has increasingly pushed markets to price in multiple rate cuts by year-end, creating intense political scrutiny on the Fed’s independence even as fears linger about the prospect of recession and global uncertainty.

Fed Governor Christopher Waller put it succinctly, saying, “The Fed funds rate is currently above the neutral rate, meaning monetary policy is restricting the economy. Inflation is likely to move much closer to the Fed's goal in six or seven months. We need to start cutting interest rates at the next meeting and make multiple cuts in the coming months.” Waller’s comments highlight this pivotal moment: the Fed preparing to open the doors to rate cuts as it seeks to stay ahead of a sharp slowdown in the job market and ensure inflation is tamed without triggering a hard landing.

Across the Atlantic, the European Central Bank (ECB) reaffirmed its cautious stance by keeping interest rates unchanged at its July meeting, acknowledging resilient economic data but emphasizing the fragile outlook amidst trade uncertainties. This dovish approach, coupled with slowing U.S. growth expectations, contributes to a weakening U.S. dollar, which remains under pressure with markets anticipating further Fed easing. This marks a critical juncture in global monetary policy dynamics: the U.S. Federal Reserve appears poised to shift from a pause to a series of rate cuts, aiming to preempt economic slowing, while the ECB moves in the opposite direction - transitioning from earlier expectations of rate cuts to a cautious pause amid a fragile but stable economic outlook.

Adding to this shifting policy landscape is the strengthening of China’s offshore yuan (CNH), underpinned by a robust rebound in mainland equity markets. The CSI 300 index surged 8% in August, approaching multi-year highs and attracting capital inflows that have supported the CNH. As a result, USD/CNH has retreated to around 7.12, marking a 10-month low and reinforcing the broader narrative of dollar weakness. 

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We conclude with the following hypothetical trades:¹

Case study 1: Short Offshore Chinese Renminbi futures

A weaker U.S. labor market could push the Fed toward easing, pressuring the dollar. In this scenario, if one holds a bearish view on the dollar, one could consider taking a short position in the Offshore Chinese Renminbi (CNH) futures at the current price level of 7.1345, with a stop loss at 7.1845, a hypothetical loss of 0.050 points if the downwards move does not materialize. Looking at Figure 2, if the USD/CNH breaks the support from the current level of 7.1345, it has the potential to reach 6.9845, leading to 0.1500 points in the short position. Each Offshore Chinese Renminbi futures contract represents 100,000 USD, and each 0.0005 point move is 50 CNH.

Case study 2: Long Euro FX futures

If the ECB’s pause supports the euro while U.S. easing weighs on the dollar, those holding a bullish view on the euro could consider taking a long position in in Euro FX (6E) futures at the current price level of 1.16565. A stop loss at 1.15040 would limit a hypothetical loss of 0.01525 points if the upward move does not materialize. Looking at Figure 3, if the EUR/USD sustains the upward move, it has the potential to reach 1.22160, leading to 0.05595 points in the long position. Each Euro FX futures contract represents 125,000 euro, and each 0.00005 point move is 6.25 USD. Micro EUR/USD futures contract is also available at 1/10 of the standard contract size.

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¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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