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While there are no shots fired, the US-China economic conflict continues to simmer. The latest flare-up in trade tensions, centred around technology restrictions and strategic materials, is once again rattling global markets.

Investors are keeping a close watch as the United States and China re-enter a phase of economic brinkmanship. This latest chapter focuses on crucial sectors such as semiconductors, metals like steel and aluminium, and the geopolitically sensitive realm of rare earth elements. Unlike previous iterations, however, this round is marked by a sharper tone: an election cycle in the US, a more assertive Beijing, and mounting global inflation that raises the stakes on every policy shift.

The latest policy moves have been calculated. Washington has tightened restrictions on the export of advanced AI chips, further limiting China’s access to top-tier tech. Beijing, unsurprisingly, has hit back, labelling these restrictions as discriminatory and rallying support through the WTO framework. The situation escalated further when President Trump announced a substantial tariff hike, doubling levies on global steel and aluminium imports to 50%, with China clearly targeted. He cited violations of international trade agreements, an accusation China has rejected but not yet diffused diplomatically.

Uncertainty tends to unsettle markets, and this resurgence of tension is prompting traders to search for historical parallels. Are we revisiting the volatility of 2019? There are similarities, but also important differences. Back then, fears were eventually calmed by the so-called ‘Phase One’ deal, which allowed both sides to claim partial victory without major concessions. Today, political incentives have shifted. Trump’s combative stance appeals to his base, while China appears more determined than ever to press on with domestic self-reliance, particularly in chips and energy.

Despite the tough rhetoric, both sides recognise the dangers of a full-blown decoupling. US automakers could be severely impacted by rare earth tariffs, and restrictions on AI chip exports might cost firms like Nvidia billions. China, though advancing fast, still depends heavily on imported high-performance technology to sustain its AI growth. Disruption seems inevitable, but neither party is yet ready to embrace mutual economic damage.

Market Movements This Week

Volatility is likely to persist in the short term, especially across commodities, technology shares, and traditional safe havens such as gold. Risk appetite may be curbed as investors reassess the likelihood of extended uncertainty.

The US Dollar Index (USDX) continues its drift lower, testing the 99.80 region before fading slightly. If the price consolidates at this level again, traders should monitor for bearish setups targeting the next leg down toward 99.15. A breach below 98.80, followed by structure around 98.00, could pave the way for a new yearly low. However, any hawkish shift in Powell’s upcoming remarks could stall this bearish pressure temporarily.

Meanwhile, the euro rebounded cleanly from the 1.1390 level last week. If EUR/USD holds above 1.1360, fresh upside could unfold. Markets are awaiting Thursday’s ECB decision, where a rate cut to 2.15% from 2.40% is expected. However, a cautious stance from the ECB may limit gains, regardless of technical momentum.

Sterling has also pushed higher, climbing past 1.3500. Should GBP/USD stabilise around 1.3485 again, further gains toward 1.3600 may follow. However, inflation concerns in the UK could complicate the outlook, especially with CPI data due.

The USD/JPY pair reversed lower, hovering near 142.60. If consolidation forms near this support, watch for further downside towards 141.00. Bearish setups gain traction, especially if BOJ Governor Ueda signals further hawkishness in his Tuesday remarks. Upside resistance now stands near 143.85.

USD/CHF remains soft. A minor retracement might retest the 0.8220 zone, which is now a key level for bearish re-entry. With risk sentiment shifting rapidly, the franc’s safe-haven status could gain appeal if trade disputes deepen.

The Australian dollar bounced following a test of recent lows. If AUD/USD stabilises around 0.6455, a move towards 0.6530 could materialise. Even a retreat to 0.6370 may offer a fresh buying opportunity, with GDP data due midweek forecast to slow to 0.40% q/q from 0.60%.

NZD/USD mimicked the Aussie’s path, trading higher. If price stalls near 0.6000, bullish setups can resume; otherwise, 0.5970 acts as deeper support. Kiwi traders will track China’s next move closely, given trade interdependencies.

USD/CAD dropped further with limited retracement, indicating strong loonie strength, likely supported by oil prices. If the pair consolidates near 1.3780, bears could target 1.3660 next. Canada’s own rate decision on Wednesday, forecasted at 2.50% (down from 2.75%), could halt this move if the central bank softens its tone.

Gold soared above $3325.45 before easing slightly. If price holds near $3310, a continuation toward $3365.74 is likely. Ongoing geopolitical uncertainty and weaker US data are keeping the metal firmly on investors’ radar as a hedge.

WTI Crude (USOIL) is moving in a broader consolidation pattern. If price breaks $63.327, traders should be alert for a drop before a volatile upswing. Energy markets are particularly exposed to trade disruptions and would react strongly to any real sanction developments.

S&P 500 (SP500) bounced from the 5850 level. If the index breaks 5928.30, it could unlock bullish extension toward 5980. If it loses steam and posts a swing low, expect a retest of 5685. Investors are watching Powell closely—hawkish surprises could undercut current momentum.

Bitcoin is consolidating near key levels. A rejection around 107490 could lead to a fall toward 99660 or even 97300. The broader crypto space remains vulnerable to macroeconomic surprises and shifting liquidity conditions.

Silver (XAG/USD) rebounded after testing support. If price stalls again near 33.05, bulls may step back in. A pullback to 32.25 offers another buying zone. A confirmed break above 33.683 would likely trigger tests of 33.80, a key structural pivot.

Ethereum (ETHUSD) traded lower, and if the price drops to 2415 or 2215, those levels may trigger long interest. Crypto assets are tracking risk sentiment closely, and as equities teeter, traders may seek opportunity in volatility-driven setups here.

Across all assets, the pattern this week is clear: markets are sensitive, but not panicked. Price actions are drifting toward key zones, areas where any shift in central bank tone, economic print, or cross-border headline could trigger sharp reactions. Traders should treat these levels as battlegrounds, not certainties. Watch for consolidation first, then confirmation. The structure matters now more than ever.

Key Events This Week

Monday, 2 June: The US ISM Manufacturing PMI rose slightly to 49.3 from 48.7, suggesting stabilisation, but still signalled contraction—barely enough to influence broader market sentiment.

Tuesday, 3 June: A key day as Jerome Powell speaks. Markets will be dissecting his words for any shift in rate cut expectations. Meanwhile, BoJ Governor Ueda is also due to speak. The US JOLTS job openings data is scheduled, with a drop from 7.19 million potentially reigniting labour market concerns.

Wednesday, 4 June: Australia’s GDP is expected to slow to 0.40% q/q, underlining a cooling economy. Canada’s central bank is also in focus, with a 25 basis point cut expected. Oil prices may play a secondary but supportive role for the Canadian dollar.

Thursday, 5 June: The ECB is widely expected to reduce its key rate from 2.40% to 2.15%. Traders will be most interested in Lagarde’s guidance—any suggestion that this is part of a broader easing cycle could hit the euro hard, despite recent technical strength.

Friday, 6 June: The week concludes with the US Non-Farm Payrolls report. Forecasts point to a gain of 130,000 jobs, down from 177,000. Unemployment is expected to hold at 4.2%. A weak number could pressure the dollar and lift gold, while a strong print might reinforce the Fed’s cautious stance and support the greenback.

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The Bank of Japan is expected to pause its routine cuts in government bond purchases next fiscal year. Since last summer, the central bank has been reducing its bond buying by ¥400 billion each quarter. However, rising yields could pose risks that might stop further cuts. Officials are concerned that continuing these reductions could lead to higher yields, making economic and debt management more challenging. In simpler terms, the Bank of Japan has been steadily cutting back its government bond purchases every three months. Initially, this was a careful way to withdraw support from the bond market. Recently rising yields, however, have created unintended consequences, such as market instability and increased costs for managing public debt. Policymakers are worried that if the current cuts keep going, bond yields could shift more dramatically. Higher yields mean higher borrowing costs for the government. This isn’t just a budget problem; it also hurts confidence in the central bank’s ability to maintain stable financing conditions, which is very important to them. What does this uncertainty mean for those tracking or investing in interest rate derivatives? First, expect the yield curve, especially at the longer end, to react more to policy changes in the short term. A pause in cuts will signal to the markets that monetary tightening may be finished or under careful review. The central bank might not act directly, but signals of caution can still move prices. This might lead to increased activity in long positions in swaps or futures sensitive to duration. Kanda and his team are likely watching inflation risks closely, but they seem more aware of financial conditions and debt stability. This doesn’t mean a policy change is coming, but it lowers the chances of aggressive cuts. This situation could also narrow the range for short-term yield expectations, which might dampen implied volatility. Less potential for sharp increases means volatility sellers, especially in short-dated options, may find today’s prices appealing, though they should be cautious of sudden changes around official meetings. From our perspective, keep an eye on how commercial banks and pension funds adjust their portfolios. They may slow their duration shedding or even take opposing defensive trades. Directional moves in payers and receivers should reflect this shift. Typically, we’d expect receivers to dominate when yield expectations peak, especially if inflation eases or growth slows. Regarding basis plays, particularly between JGBs and foreign rates like US or European rates, traders should watch for policy updates in other regions. As the Bank of Japan leans toward neutrality while other central banks are careful, there might be more chances for rate differences across markets. Lastly, remember this is a cycle where major moves are driven by policy adjustments, not unexpected economic data. So, pay close attention to central bank communications in the coming weeks. It’s not just about big asset purchases or sudden cash injections anymore; it’s about understanding the nuances in language, timing hints, and the discipline shown in restraint.

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The Bank of Japan (BOJ) is being encouraged to continue or ease its plans for reducing bond purchases beyond fiscal 2026. This recommendation comes in light of recent fluctuations in super-long Japanese government bond yields and a dip in demand. In May meetings, many participants suggested maintaining or only slightly lowering bond purchases. The BOJ plans to cut its monthly bond purchases to ¥3 trillion by March 2026. Some members advocate for reducing this to ¥1–2 trillion per month, while others suggest keeping the current rate or pausing cuts for super-long bonds due to liquidity worries. This range of opinions shows the challenges facing the BOJ. The central bank will review its approach during the policy meeting on June 16–17.

Calls for More Flexibility

During the meeting, participants requested more flexibility, especially regarding super-long bonds. Some warned against reacting too quickly to shifts in market conditions, as weak demand could hinder the BOJ’s ability to manage volatility. Despite ending negative interest rates and starting a gradual taper, the BOJ still owns nearly half of all outstanding Japanese Government Bonds (JGBs), lagging behind other countries in reducing support initiated during the crisis. This situation highlights recent tensions around the Bank’s bond purchasing strategy. With yields for longer maturities becoming erratic and buyer confidence dwindling, various voices are urging the BOJ to either slow down or halt their plans to cut support. The goal was to halve monthly purchases by the end of fiscal 2026. However, lower demand for longer-term bonds is raising concerns among both policymakers and market analysts. The upcoming review on June 16–17 will be crucial in determining the BOJ’s next steps. At recent policy discussions, some members have advocated for a more cautious approach, noting decreased demand and potential fragility in market dynamics. The risk of unpredictable pricing is also a significant concern. These worries are justified, as yields on super-long bonds have recently fluctuated more than usual. The primary issues now revolve around liquidity and unstable trading conditions rather than long-term inflation or growth. Lately, we’ve noticed yield gaps widening more than usual during quieter market hours. This trend indicates a decline in market depth and resilience. While a slight reduction in purchases might be manageable for shorter-term bonds, it could be wiser for the central bank to delay cuts for longer maturities. Being flexible with tapering can improve market stability and prevent disruptions, especially in the current climate of uneven sentiment and one-sided investor flows.

Considering Market Constraints

With the BOJ’s bond holdings comprising nearly half of all outstanding bonds, the market may feel overly dependent on a single entity. This dependence restricts traders and limits their exit options, potentially leading to more frequent liquidity issues, particularly with off-the-run bonds or those with longer maturities, which carry greater risk. It may be too early to price in taper reductions for super-long bonds given the volatility observed in the 20- and 30-year maturities, suggesting that the market hasn’t fully absorbed the current supply. If the BOJ were to slow down or pause reductions, it would be prudent to adjust their strategy accordingly. Risk management should involve tighter limits for these maturities, and adjustments for breakeven points should reflect wider fluctuations, typically exceeding ±6 basis points throughout the trading day. Current market depth metrics have not yet returned to the levels seen before the pandemic. One challenge now is predicting policy changes that respond to liquidity issues, creating a complex feedback loop. Longer-term bond auctions may underperform without clear signals from the central bank. For now, focusing on shorter durations, where price discovery is more accurate and demand remains decent, may be the best approach. Additionally, recent shifts in swap rates indicate that forward curves might not be reliable indicators. The small but consistent discrepancy between physical and synthetic pricing introduces uncertainty around actual expectations. This complicates efforts to hedge against taper signals through futures or swap spreads. In summary, timing is crucial. If support is pulled back too soon while demand remains weak, it could lead to chaotic market behavior, which must be avoided. It’s better to wait for a clearer view on capital movement before tightening liquidity further in an already thin market. We will closely monitor auction results and bid-to-cover ratios over the next two cycles. Significant declines in these areas could lead us to anticipate widening spreads in relation to European markets. Create your live VT Markets account and start trading now.

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UK Trade Minister Jonathan Reynolds and U.S. Trade Representative Jamieson Greer will meet to discuss a recent trade agreement amid worries about new U.S. steel tariffs. This meeting is part of Reynolds’ three-day visit to Paris and Brussels, where he will review trade relations with the U.S. and EU. The agreements aimed at lowering tariffs on British car and steel exports to the U.S. are still informal, with no final details. Complicating matters, President Trump announced a 50% increase in steel tariffs starting Wednesday.

Impact On British Producers

UK Steel is concerned that this tariff increase could significantly hurt British producers. Ongoing talks between the UK and Washington seek to understand how the new tariffs will affect the trade deal. Reynolds highlighted the need to strengthen relationships with the G7 and EU to support UK businesses and exporters. Reynolds is working with Greer to figure out how to implement a tentative trade agreement, coinciding with the U.S. doubling steel tariffs. This is problematic as both governments have been trying to reduce tariffs on British goods, like cars and steel. However, these tariff cuts remain unofficial, creating uncertainty for exporters who were hoping for some relief. Reynolds’ visit to Paris and Brussels indicates that the UK is looking to improve its economic ties beyond the U.S., perhaps to better support local companies in the global market. It shows that officials need to respond quickly to changes in U.S. policies that may not align with previous agreements.

Strategic Trade Discussion

The timing of the U.S. tariff increase is inconvenient but not surprising. The notion that higher steel duties won’t affect British producers is unrealistic. With the trade deal’s details still unclear, traders should stay informed and monitor updated tariff schedules in the coming days. UK Steel’s warning should be taken seriously. When an industry group says the consequences could be swift and widespread, it reflects their direct exposure to global prices. Ignoring these warnings would be overly optimistic. Traders in metals or related derivatives may need to rethink their positions regarding industrial exports or import-sensitive ETFs. It may also be wise to prioritize U.S. regulatory updates and observe the spread between British and U.S. futures. In meetings like these, especially regarding steel and automotive trade, we don’t take outcomes for granted. We look at legislative timelines, check public comment periods, and keep track of closed-door updates. Trade execution becomes more urgent, and we must consider the potential for changes in metals contract pricing—not just for steel. Reynolds emphasized the focus on practical outcomes. “Adapting relationships” means addressing loopholes, exemptions, or temporary suspensions when feasible. Derivatives linked to industries, shipping logistics, or foreign tariffs could see significant impacts. If the tariff increase occurs without concessions, we may see surges in those markets. In the coming weeks, we’ll gain clarity as plans either solidify into policy or fall apart. Until then, short-term exposures related to steel or autos may face higher volatility. It’s time to adjust our risk management strategies accordingly. Create your live VT Markets account and start trading now.

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New Zealand’s terms of trade index for Q1 2025 increased by 1.9% compared to the previous quarter, but this was below the expected 3.6%. The index also declined from a previous quarter’s gain of 3.1%. However, year-on-year, it showed a strong increase of 17%. Export prices rose by 7.1%, driven mostly by higher dairy prices. This surpassed the forecast of 3.7% and last quarter’s 3.2%. Import prices also went up by 5.1%, well above the expected 1.3% and last quarter’s 0.1%. The Reserve Bank of New Zealand reported a 5.3% year-on-year decline in the trade-weighted NZD index. The New Zealand dollar weakened against major currencies, affecting both import and export prices. Export volumes grew by 4.6%, while import volumes fell by 2.4% compared to the last quarter. The terms of trade measure the ratio of export prices to import prices. An improving terms of trade suggests that export prices are rising compared to import prices, which can enhance purchasing power and support economic growth. On the flip side, a declining terms of trade can limit export purchasing power and hinder economic growth. Despite the lower-than-expected overall increase in the terms of trade, stronger-than-anticipated export prices relative to import prices resulted in a positive change this quarter. The 1.9% rise indicates some strength, but it is significantly below the expectations, highlighting potential fragility. Our analysis indicates that a weaker currency has largely influenced this situation. The decline in the local dollar has increased both exports and imports. Exporters gained better competitiveness in international markets, while importers faced higher costs due to the weaker currency. This situation pushed both price indices higher, yet the gap between export and import prices grew, reflecting an overall improvement in the terms of trade—though not to the extent that had been hoped. Looking at volumes tells a different story. Export volumes increased steadily, supporting price growth. However, the decline in import volumes may signal demand softening or, more likely, postponed purchases due to rising costs. With both export prices and volumes increasing, it appears that exporters were better positioned this quarter. This suggests a focus on relative export strength, especially for sectors heavily involved in dairy. However, growing import costs could create additional pressures elsewhere. Rising input prices introduce new risks to manage. If the local currency continues to depreciate—a possibility mentioned by the central bank due to a year-long downward trend—then businesses may need to adjust their hedging strategies more actively. The gap between actual data and forecasts is significant and shouldn’t be overlooked. Rising forecast risk can erode confidence in future economic data, potentially increasing volatility around market releases. This misalignment could lead to short-term market mispricing, creating opportunities for those with realistic expectations. For those tracking commodity exposure, especially in agriculture, strong export prices indicate potential for more gains if demand from key international partners remains steady. However, rising import costs and margin pressures may squeeze businesses that rely on imported inputs for export production. Being proactive with risk management could help maintain stability. It’s also important to note that real purchasing power remains relatively high, which may support domestic demand. Still, any strength in consumer spending will depend on how much of the increased export revenue translates into wages and business investments—an aspect to monitor closely. The difference between rising prices and flat or declining trade volumes can signal that prices are outpacing real economic activity. Caution is warranted here. Trade strategies that focus solely on price trends, ignoring volume changes, may falter if genuine economic activity diminishes. We view this report as a call to maintain a cautious approach. It emphasizes the need to align market exposure with real economic changes rather than just following nominal trends. If models overly depend on projected relationships, they should be re-evaluated under more volatile conditions. Markets are adapting to wider uncertainties, so we must do the same.

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Standard Chartered expects the euro to stabilize around 1.14. This forecast is supported by a consistent policy from the European Central Bank (ECB) and an improvement in German economic sentiment. However, movements back toward US assets could affect this outlook. The euro’s value is influenced by trends in the US dollar and European economic data. A stronger German IFO business climate index and anticipated stimulus from Berlin support the currency. The ECB is likely to cut rates by 25 basis points soon, with no further changes expected this year, which should help the euro’s stability.

Potential Short Term Shifts

Standard Chartered warns that there may be short-term shifts towards US assets that could weaken the euro. As a result, the EUR/USD pair may stay within its current range. Technical analysis shows that the EUR/USD pair is supported above its 50-day moving average, providing near-term stability for the euro. Overall, it is expected that the euro will maintain a stable position around 1.14. This expectation is based on steady actions from the ECB and an increase in German economic sentiment, indicated by the recent IFO index. These factors support the euro. However, short-term movements favoring US markets could put downward pressure on the euro. The European Central Bank is set to make one 25 basis point rate cut, likely pausing for the rest of the year. This clarity in monetary policy often boosts market confidence, especially with rising expectations for fiscal easing in Germany. While this stimulus isn’t yet in effect, it strengthens the euro by enhancing growth potential in Germany, the region’s largest economy, increasing investor confidence.

Technical Indicators and Market Positioning

Technical indicators support this stability claim. The euro remains comfortably above its 50-day moving average, a level closely monitored by traders. This positioning suggests strong buying interest before any significant drops, indicating resilience in the near term. However, the US dollar’s influence should not be overlooked. The dollar is supported by tighter financial conditions and occasional surges in demand for US assets, which could hinder upward movement for EUR/USD pairs. Traders should stay alert to US economic events that may alter Federal Reserve expectations. Currently, the EUR/USD pair seems to be range-bound, and this trend is expected to continue unless influenced by unexpected policy changes or significant economic data from either side of the Atlantic. The key takeaway is that while the euro has strong technical and fundamental support, occasional drops due to shifts in capital from Europe to the US will need careful management. In practical terms, it may be beneficial to fade any excessive strength in the dollar near resistance levels for EUR/USD, while maintaining euro positions near support levels established by the moving average or recent lows. As markets process upcoming rate decisions and fiscal news, managing term structure positioning will be crucial, especially for those exposed to volatility. Be ready to adjust your positions quickly if yield differentials shift unexpectedly. Create your live VT Markets account and start trading now.

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Former President Trump took to social media to share his views on Iran, stating that no uranium enrichment would be allowed. This message may affect oil markets. Oil prices are slowly rising. If an agreement with Iran happens, it could weaken reasons for boosting oil supply. However, Trump’s stance against uranium enrichment might block quick deals. This could help keep oil prices stable.

Middle East Uncertainty

Trump’s recent statement about uranium enrichment adds to the uncertainty in the Middle East. By opposing Iran’s nuclear program, he increases tension in already sensitive talks about Iranian oil exports. Markets had started to consider the possibility of new oil supplies, which usually lowers prices. But now, with negotiations facing obstacles, those expectations are fading fast. In energy derivatives, especially linked contracts, we see more short-term volatility ahead. Changes that affect global oil supply can quickly impact futures pricing. The chance of new Iranian oil coming to market seems farther away, which limits the quick drop in prices. Derivative markets are starting to reflect this risk. Near-term contracts for July and August have slightly risen as hopes for rapid policy changes shrink. This pricing behavior shows a shift in sentiment—not drastic, but enough to indicate a change in previous expectations.

Geopolitical Impact

Traders should pay close attention to geopolitical news, especially regarding nuclear talks or sanctions. These updates directly affect supply expectations and prices. Timing for buying and selling must be precise since news is now influencing intraday positions more than before. In situations where policy has a big impact, timing is crucial. Currently, short-term supply factors are being prioritized over long-term demand trends. This focus may last for a while, so positions in longer-dated oil futures should assume prices might stay low if clear supply increases don’t appear. Finally, we shouldn’t overlook the comments from political leaders who have influenced sanctions before. While these remarks are not policies in themselves, they often lead to price changes within a few sessions. This pattern has happened in the past, and we should expect it to continue. Thus, keeping a close watch on updates is vital. Create your live VT Markets account and start trading now.

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Shocks From Abroad

Catherine Mann from the Bank of England spoke in Washington, DC, about how US policies affect UK markets. She highlighted that the 10-year UK gilt is significantly influenced by events in the US. Mann explained that Quantitative Tightening (QT) might reduce some impacts of the Bank of England’s rate cuts on long-term bonds. For more information, you can read Mann’s full speech on the Bank of England’s website. Mann’s insights reveal that external shocks, particularly from the US, are still impacting UK markets. She explained that UK bond yields, especially long-term ones, respond more to decisions made in the US than to local announcements. This means that UK gilts are not completely shielded; they react in real-time to interest rate expectations set by the Federal Reserve and shifts in global demand for long-term debt. Mann also discussed QT, suggesting that asset sales from the Bank of England’s balance sheet could balance out the typical decline in long-term bond yields that usually follows rate cuts. This suggests that as monetary policy loosens, the expected drop in long-dated gilt yields may not be as significant. The balance sheet runoff could prevent yields from declining too quickly. This has immediate implications for trading in long-term bonds. We need to pay attention to both the rate decisions in London and the asset supply changes from the Bank of England’s QT schedule. These factors are pulling in different directions, and this tension will likely persist. Additionally, signs of strength in the US economy have already led to higher inflation expectations, keeping upward pressure on global yields.

Market Implications

Changes in sterling interest rate derivatives may not always reflect local demand or domestic inflation. Sometimes, the movements are driven by fund hedging strategies from Europe or the US—adjusting portfolios in response to overseas rate changes. Mann pointed out this dependency. This indirect exposure complicates the understanding of pricing dynamics when viewed only through a local lens. For now, it’s important to closely watch cross-market spreads, especially the gilt-Treasury basis at longer maturities. Mann suggests this might differ more than usual if QT effects remain strong here but ease elsewhere. Trades must be aware of this asymmetry to prevent misalignment with duration risk. We should also consider that policymakers might be less likely to cut rates aggressively if they think the balance sheet runoff is tightening conditions on its own. This means that rate forecasts could be too low if they assume the policy rate operates independently from asset purchases. Conversely, any indication that QT will slow down might bring long-term rates closer to pricing in those cuts, although the impact would depend on timing and communication. As volatility affects secondary outcomes, we need to consider liquidity conditions and reactions to global signals, rather than just local policies. Some usual correlations may not hold as strongly this summer. Timing these shifts will be crucial for interest rate strategies. Create your live VT Markets account and start trading now.

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Impact On USD Movement

The USD dropped sharply against several currencies, losing -1.33% against the NZD and -1.00% against the AUD. It performed slightly better against the CAD, down -0.21%, which is the lowest level since October 2022. The dollar also fell by -0.62% against the GBP and -0.83% against the EUR. US yields increased slightly, with the 2-year rising by 2.0 basis points to 3.938%, and the 10-year up by 2.6 basis points to 4.443%. US stocks gained, with the Nasdaq up by 0.67%. The S&P and Dow rose as well, increasing by 0.41% and 0.08% respectively. The ISM manufacturing index stayed below 50 at 48.5 and construction spending decreased by -0.4%. The prior month’s figure was revised down to -0.8%. The Atlanta Fed GDPNow forecast for Q2 growth jumped to 4.6%, up from 3.8%. The Q1 GDP stood at -0.2%.

Market Outlook And Dynamics

This section highlights a complex web of trade tensions and their direct effects on major asset classes, especially foreign exchange and fixed income. It all starts with friction between the US and China, characterized by back-and-forth trade restrictions, leading to more extensive tariff increases. Washington’s decision to double tariffs on steel and aluminum imports by mid-2025 indicates a renewed wave of protectionism, focusing on boosting domestic production rather than seeking global cooperation. The dollar’s recent pullback against several developed-market currencies reflects concerns that these tariffs and possible retaliations may hurt global demand and create capital flow volatility. The significant drop in the USD compared to the New Zealand and Australian dollars, and less pronounced decline against the euro and GBP, shows that commodity-linked and higher-yielding currencies have gained support. The slight drop against the Canadian dollar can be attributed to oil’s slow movement and the complex trade ties between the two North American economies. US Treasury yields have seen a modest increase, indicating some repositioning after a period of uncertainty over interest rates. The slight uptick in short-term yields suggests that inflation expectations are staying stubborn, while longer-term yields hint at confidence in the upcoming quarter’s strength, as indicated by the revised Atlanta Fed GDPNow estimate. The financial markets, led by equities, seem to expect continuity in policy rather than drastic emergency measures. Manufacturing data remains weak, with the ISM index sitting at 48.5, still in contraction mode. This ongoing weakness, along with the drop in construction spending, suggests soft output. The revised lower figure for last month may influence the pricing of industrial-sensitive instruments. On the bright side, the GDP tracking model shows an upward trend, indicating a gap between hard data and predictive indicators. Such quarter-to-quarter shifts can lead to pricing dislocations in growth-sensitive assets, especially those heavily tied to real assets. As the dollar faces scattered pressure and yields drift upward, mixed growth signals offer little reason for calm in the coming days. Traders exposed to short-term implied volatility may find premiums stable unless corrective headlines emerge from the trade dispute. The tightening in front-end curves doesn’t appear alarming yet but indicates hesitance to predict a smooth policy path, especially with uncertainties about the timelines for tariff changes set for mid-next year. Volatility spaces might widen due to unresolved policy decisions, especially as trade partners respond mid-week. Keep an eye on AUD and NZD pairs, which could remain strong for now. Additionally, changes in rates and foreign exchange highlight potential opportunities for elevated basis trading, given current reactions in cross-currency spreads. Spot positioning, particularly where economic expectations diverge from recent data, should be re-evaluated against the evolving guidance from central banks, especially where inflation predictions have been premature. Market symmetry could remain fragile for the time being. There’s no clear signal for a reversal in short-term currency performance. With only slight changes in front-end rates, options skew is likely to remain directional, favoring yield-supported currencies. This scenario makes short volatility less appealing unless combined with tight delta hedging around scheduled data or central bank announcements. Pay close attention to upcoming macroeconomic releases related to capital expenditure and goods production, as market participants are re-evaluating cyclical assets more aggressively than service-related ones. If fiscal barriers widen, safe-haven assets may see renewed interest, but not uniformly. Ensure to adjust risk-weighting accordingly. Create your live VT Markets account and start trading now.

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