The US dollar fluctuated after the non-farm payrolls report. At first, it gained strength, but then it fell against the euro, pound, and commodity currencies within hours. Profit-taking happened in euro positions, likely due to expected US-EU talks over the weekend. Based on past events, we can anticipate further changes and volatility in this situation. Meanwhile, the USD/JPY pair made gains, thanks to a 9 basis points rise in US 2-year yields and an increase in risk assets. The S&P 500 rose by 0.85%, getting close to its daily high, with USD/JPY nearing its peak for the period. Initially, the dollar strengthened after the non-farm payrolls data. Markets interpreted the figures as a sign for tighter monetary conditions, but that reaction quickly faded. The dollar lost value again, especially against high-beta currencies and stable major currencies. This signals a fragile sentiment. After some time, it seemed that investors reassessed the data, perhaps due to softer inflation expectations or worries about the labor market’s strength. The profit-taking in euro positions indicates that some traders are reluctant to hold large positions ahead of known risks. The upcoming talks between the US and EU on issues like trade and digital regulation have historically influenced short-term market signals. When traders decrease their exposure, it usually results in lower liquidity and more volatile price movements. As the week progresses, we might notice tighter trading ranges until news from policymakers is available. Regarding USD/JPY, the rise in US yields isn’t surprising when they jump by nearly ten basis points. A 9 basis point increase in the 2-year yields suggests stronger rate expectations, which typically strengthens the dollar against currencies with flatter yield curves. It’s not only bonds driving these changes; the rise in risk assets like stocks shows renewed investor interest, pulling capital into sectors that benefit when sentiment is positive. This further weakened the yen, as there wasn’t much short covering happening. Additionally, the S&P 500 approaching its session highs creates a feedback loop, where rising stock prices lower demand for safe-haven currencies. In pairs like USD/JPY, which often move in tandem with US stock performance and short-term real rates, this dynamic is especially active. Notably, there hasn’t been much talk from Japan about intervention, which allows traders more freedom. This environment requires careful attention to flows. If pricing continues to reflect interest rate speculation rather than strong data backing, volatility in short-term spreads will likely remain high. Directional trades need solid justification beyond broad risk signals. We are also monitoring options pricing, where implied volatility is above recent averages, indicating that positioning is still defensive rather than directional. In the upcoming sessions, price sensitivity to interest rate discussions will likely stay high. What we observe in price action is reactive rather than predictive. Misinterpreting sentiment shifts could lead to forced adjustments, especially in strategies reliant on leverage tied to rates and equity momentum. It’s wise to focus on yield differences and divergence themes instead of getting caught up in the latest headlines. Movements in spot FX showcase a real struggle between rate expectations and political uncertainty—something we have witnessed in previous cycles. Looking ahead, short-term strategies may continue to dominate, as timing remains challenging. Markets are still reacting rather than showing commitment.

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