Today features a limited number of economic indicators, with the UK Employment report being the most noteworthy. The report indicated a weaker job market performance.

Attention is centred on US-China trade discussions, scheduled to resume at 10am London time. Positive remarks from US representatives provide optimism for potential progress and additional future negotiations.

Anticipation Builds for US CPI Report

Anticipation is also building for tomorrow’s US CPI report. This report may impact market activity, as it precedes the FOMC decision next week.

With the UK labour market showing weaker-than-expected results, we’ve noticed trimming of positions tethered to sterling strength. The softer employment data implies subdued wage pressure, which in turn should ease concerns at the Bank of England about inflationary persistence from the domestic economy. Traders have begun reducing exposure to short-term rate hikes as forward curves adjust slightly lower. Volatility across gilts has remained contained for now, though we expect the readjustment to continue if similar softness is confirmed in subsequent data releases.

Meanwhile, market participants reoriented some risk ahead of the renewed discussions between Washington and Beijing. There has been a modest shift in pricing for assets sensitive to trade restrictions, given tentative optimism stemming from comments by US officials earlier this week. Investors will need to remain alert around the start of the negotiations, particularly following previous rounds where headline-driven moves occurred within minutes of statements. While no firm resolutions are expected today, a tone of cooperation could keep equities buoyed and risk appetite intact — at least in the short term.

Upcoming Market Dynamics and the Fed Announcement

Most importantly, tomorrow brings the US CPI figures, a data point that rarely passes without reaction. With the next Federal Open Market Committee decision fast approaching, we’ve already seen option markets position more defensively. There is a clear pickup in demand for near-term hedges in both Treasury and equity futures. A hotter-than-expected print would likely force re-pricing on the shorter end, as expectations for potential rate cuts slip further out. Conversely, an undershoot may invite short cover bids and drive downward pressure on the dollar as markets lean into dovish guidance.

Derivative traders should keep close tabs on short-dated implied vols, particularly in the SPX 1-week contracts and 2s-10s curve trades, as gamma exposure can intensify on abrupt realignment of inflation expectations. We’ve observed delta-hedging flows behaving more sensitively around CPI drops in prior months, suggesting that the current market may overreact to even modest surprises in either direction.

Going into next week, flows may become more erratic, with positioning likely to turn defensive ahead of the Fed announcement. Historically, moves in swap spreads and FRA-OIS basis suggest increased demand for liquidity instruments during periods of heightened policy uncertainty. This week resembles those conditions, though with added sensitivity due to the number of market-moving events within close range.

For those watching risk reversals in major index options, pay attention to skew widening — it’s often a reliable early signal of shifting bias. Calendar spreads, too, have cheapened, indicating anticipation of future volatility while pricing less movement for tomorrow’s reading. That divergence offers opportunities, but requires agility.

Avoid becoming anchored to previous reactions. The macro backdrop has changed, and markets are responding with somewhat edgier sentiment. Keep risk properly sized and stay nimble, particularly through Wednesday’s CPI release window. We expect more volume to come through overnight books than in the day session, especially from Asian real-money accounts adjusting US exposure.

Monitor cross-asset relationships as well — gold’s reaction to CPI, or yen crosses tied to safe-haven flows, could steer volatility beyond interest rate products. Stay disciplined and clear-eyed; the coming sessions will reward clarity and penalise indecision.

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