Germany, France, and Switzerland will observe bank holidays for Whit Monday. However, both the Xetra and Euronext exchanges will stay open, so trading will proceed as planned in the second week of June. The dollar is slightly weakening, and investors are feeling more cautious. Right now, the focus is on the US-China trade talks taking place in London, which is seen as a key event early in the week.

Impact On European Markets

Even though trading venues throughout Europe are open, Monday’s reduced staffing and lower trading volumes might create a false sense of calm in the market. With some areas observing Whit Monday, less activity could lead to price changes that are more automatic rather than driven by market fundamentals. This may create opportunities for mispricing, especially for assets sensitive to short-term liquidity. Generally, in these conditions, institutional trading impacts prices more than new information coming in. Meanwhile, the support for the dollar is easing. The recent dip in the dollar seems to be tied to lower positioning and declining inflation expectations. Treasury yields have slightly decreased, prompting currency traders to reduce risk, particularly in leveraged strategies. The options market is showing a slight rise in implied volatility for major currency pairs, indicating that concerns about central bank decisions are still prevalent. In a broader sense, the meetings between trade advisers from the US and China are getting more attention. With London hosting this round, expectations favor gradual progress rather than major breakthroughs. Any discussions about subsidies, intellectual property, or export controls will be analyzed closely afterward. Federal Reserve Chair Jerome Powell and his colleagues have maintained their stance. Rate cuts are not on the table for now, even as slowing manufacturing data and fluctuating consumer sentiment raise questions in the bond markets. We’ve seen the short end of the yield curve react nervously, swinging between dovish comments and hard data that fails to support cuts. However, the risk of an inverted yield curve has lessened slightly, at least until June’s reports provide more clarity.

Outlook For Interest Rate Derivatives

We’ve observed a rise in volatility for shorter-dated US interest rate derivatives, which isn’t surprising given their sensitivity to quick policy changes. As trade talks proceed, any remarks indicating disagreement could shift rate expectations again. We expect two-year futures to react the most to these changes. Looking towards Europe, the flash PMI data from the eurozone due later this week could impact the stability of bund futures. Economists expect a slight decline in services but some resilience in construction sector surveys. Forward rate agreements are already reflecting a less aggressive approach from the European Central Bank (ECB), and any changes in the data will either confirm or challenge these expectations. Traders involved in EUR swaps should re-evaluate their positions as these data releases approach. In our view, the next sessions won’t focus on following trends but rather on understanding the subtleties of scheduled and unscheduled news. Machines and algorithms may react first, but it’s the discretionary trades that ultimately settle the market during London hours. We’re particularly alert to automated triggers at key levels in dollar-yen and ten-year Treasury futures, which can amplify movements that would otherwise be minimal. More broadly, the short-term differences between European and US yield curves reflect contrasting growth stories. If the German 10-year bund stays below 2.5% and the US counterpart approaches 4.5%, the ongoing rate gap will likely increase demand for the dollar, regardless of geopolitical sentiments. However, this relies on the upcoming Non-Farm Payroll (NFP) report not causing significant disruption. Positioning data is showing a heavy long dollar exposure, which could result in a sharp reversal if trade discussions succeed and the Federal Reserve turns dovish. Until these events happen, many institutions seem to prefer staying long on the dollar, using options to hedge against potential downside risks. This indicates clear market sentiment. Trading volumes for interest rate derivatives have increased ahead of the event risk, particularly in three-month eurodollar contracts. Price movements suggest either a hawkish surprise or a breakdown in negotiations. We believe that the premium on shorter-dated puts compared to calls indicates more concern about downside risks rather than strong directional beliefs. As liquidity improves later in the week, especially after Wednesday, we expect more accurate pricing to emerge. Until then, traders should be ready for potential volatility in low-volume markets influenced by limited participation and speculative macro outlooks. Create your live VT Markets account and start trading now.

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