(Bloomberg) -- Whether it’s another move up or a dive down, traders are bracing for added volatility wrought by Wednesday’s dual macroeconomic catalysts: a report on consumer prices in the morning and the Federal Reserve’s rate decision in the afternoon.

The options market is betting the S&P 500 Index will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy. Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023, he added.

“Over the past year, the markets have largely priced CPI and Fed days similarly at 0.75% each on average, so doubling them up makes it a bigger event and raises uncertainty around the event,” said Kaiser, who added that the S&P 500 moved 0.8% on average following each event in the past year. Of the two, Fed days have generally been more profitable events for option buyers than CPI has been, he added. 

While markets broadly expect central bankers to hold rates steady, the inflation print as well as Fed Chair Jerome Powell’s press conference will offer more clarity on how much the central bank may cut interest rates this year.

Inflation has been the main focus for investors as the labor market has remained strong. US job growth soared in May, with nonfarm payrolls advancing by 272,000, a Bureau of Labor Statistics report showed Friday. Traders are are largely comfortable with jobs creation above 150,000, Kaiser said. If it were to slide below that, the options market would likely start to shift its attention toward hiring over inflation, he explained.

Recent options activity linked to the Secured Overnight Financing Rate has been mixed. Demand has increased for hedges targeting the potential for a dovish meeting, opening the door for a rate cut at the July or September policy announcements. Fed swaps, for their part, are pricing a full 25 basis points of easing into the November decision, with various large September 2025 call flies trading on Tuesday. 

Meanwhile, investors have continued to load up on hawkish protection, targeting the end of next year and beyond. These positions stand to benefit should the summary of economic forecasts due in June indicate a hawkish shift to the longer-term Fed projections. These types of positions have been centered around December 2025 and March 2026 put-flies — some of those structures have now more than 200,000 contracts.

“The bond market continues to remain volatile around data releases while for equity the secular theme of AI dominates,” said Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist. “Periods between key data releases can see the rates market range bound and therefore dampen volatility.”

On the FX front, one-week volatility on the Bloomberg Dollar Index is at a high for the year and risk reversals have risen to over 0.4% premium for greenback calls, the highest in a month, fueled partly by turmoil in the Mexican peso. Longer term, sentiment remains relatively bearish on the US dollar, anticipating future Fed cuts. Demand has increased for call options on yield-sensitive haven currencies like the Swiss franc and yen.

--With assistance from Robert Fullem.

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