Today, there are only a few economic indicators to watch, with the UK Employment report being the most important. This report shows that the job market in the UK is weaker than expected. All eyes are on the US-China trade talks, which will start at 10 AM London time. Optimistic comments from US officials have raised hopes for progress and future negotiations. There is also growing anticipation for tomorrow’s US Consumer Price Index (CPI) report. This report could influence market activity, especially with the Federal Open Market Committee (FOMC) meeting next week. Due to the weaker-than-expected results from the UK labor market, many traders are cutting back on their positions linked to the strength of the pound. The soft employment data suggests lower wage pressures, which may reduce concerns at the Bank of England about inflation staying high. Traders are also scaling back their expectations for short-term interest rate hikes, leading to slight adjustments in forward curves. Volatility in gilts has remained stable so far, but we expect adjustments to continue if similar weak data appears in upcoming releases. Meanwhile, market players are adjusting their risk ahead of the renewed trade discussions between Washington and Beijing. There has been a slight shift in pricing for assets affected by trade restrictions, driven by cautious optimism from recent comments by US officials. Investors should stay alert during the negotiations, especially given how quickly the market can react to statements. While no major agreements are expected today, a cooperative tone could support stock prices and maintain risk appetite, at least temporarily. Importantly, tomorrow will see the release of the US CPI figures, which usually trigger market reactions. With the FOMC decision approaching, we’ve noticed that options markets are becoming more cautious. Demand for short-term hedges in Treasury and equity futures is rising. If the CPI number is higher than expected, it may lead to re-pricing on short-term rates, pushing potential rate cuts further away. On the other hand, a lower reading could spark buying pressure and weaken the dollar as markets adjust to a dovish outlook. Traders in derivatives should closely monitor short-term implied volatility, especially in SPX 1-week contracts and 2s-10s curve trades, since gamma exposure can spike with sudden changes in inflation expectations. We’ve seen that delta-hedging flows react sharply to even small CPI surprises, indicating the current market may respond strongly. As we approach next week, trading will likely become more unpredictable, with a defensive positioning expected ahead of the Fed announcement. Historically, swap spreads and FRA-OIS basis indicate that demand for liquidity instruments increases during uncertain policy times. This week fits that pattern, but with even more sensitivity due to a series of important market events close together. For those tracking risk reversals in major index options, watch for widening skew—this often signals a change in market sentiment. Calendar spreads have also become cheaper, suggesting expectations of future volatility while indicating less movement for tomorrow’s reading. This discrepancy creates opportunities, but requires quick reactions. Don’t get stuck on previous market reactions. The economic landscape has shifted, and market sentiment is more cautious. Keep your risk appropriately sized and stay flexible, especially through Wednesday’s CPI announcement. We believe more trading activity will happen overnight, particularly from Asian investors adjusting their US positions. Keep an eye on cross-asset relationships as well—watch how gold reacts to the CPI, or how yen pairs move with safe-haven flows, as these could influence volatility beyond just interest rate products. Stay disciplined and focused; the next few sessions will reward clarity and punish indecision.

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